A Fiscal Budget at Risk
The financial statement on the draft bill of the Egyptian general budget for 2021-2022 states, “The Public Treasury may have to pay compensation as a result of the adjudication of the arbitration cases against the Egyptian government or if the cases are settled amicably.” This appeared under the item of “financial risks,” without highlighting the allocated compensation amounts.
A 2020 study entitled “The State’s Compliance with Compensation for Investment Disputes” was published in ICSID Review: It notes that Egypt is one of the countries that commits to paying compensation dues in international arbitration cases.
The state does not usually reveal the value of the settlements paid by Egypt as compensation to foreign investors in return for the termination of arbitration cases. According to the International Arbitration and Settlements Sector at the Ministry of Justice, there are 37 cases, of which eleven were filed at the ICSID. The center has examined 26 cases since 2011, that is 68% of the total number of cases filed against Egypt, according to data from the center since 1984.
Arbitration cases filed against Egypt after 2011
The steady increase in arbitration cases brought against Egypt by ICSID during the last decade can be attributed to two reasons: The first is due to government decisions, including those based on political and social changes that the country witnessed during the Egyptian revolution or otherwise. These represent twelve cases.
The second reason is related to the lawsuits filed by activists and individuals against government agencies when suspecting alleged impropriety in the conclusion of such deals, and the lawsuits filed to demand the return of privatized companies and factories to state ownership and these amounted to seven cases.
Foreign investors nationalities with arbitration cases filed against Egypt after 2011 vary, due to the number of joint venture investment agreements that Egypt have signed with foreign countries. The total of such agreements reached 115 agreements , with provisions that allow the investor to resort to international arbitration to settle any dispute with the host country.
38% out of the 26 cases filed at ICSID against Egypt after 2011 are still unresolved. Only three cases or 12% of the cases have been settled in favor of Egypt.
Around half of the cases were also settled, including five that were withdrawn before or after a ruling was issued in favor of the investor. The international commercial arbitration consultant Fateh Djabi explains that a case is not withdrawn until after negotiations if it results in an amicable conclusion. Negotiations permit arbitrators to uphold the basic principles of litigation. It could also eliminate legal regulations or arbitration center’s regulations.
Djabi believes that the reason for the increase in arbitration cases against Egypt is the general neglect of applying appropriate procedures and resources upon concluding contracts with a foreign investor. This is confounded by the lack of government transparency and the bureaucratic nature of the Egyptian governmental administrative system and processes.
The Spanish Puzzle
The highest percentage of arbitration cases filed against Egypt was registered in the sector of natural gas and quarries with 23% of the total number of cases. This was followed by the sanitary and construction sectors with each amounting to 11% of the total arbitration cases filed after 2011.
The investment sectors of arbitration cases against Egypt
The case of the Spanish Unión Fenosa gas bears ICSID case No. ARB/14/4. This is a joint venture investment between Naturgy and Eni with each holding 50% and is one of the most famous cases in the natural gas sector.
In this ICSID case, the Spanish company has accused Egypt of violating the principle of fair treatment: In order to make up for the deficit in the local market in 2012, the state stopped the supply of natural gas to the Damietta Liquefaction Plant which the company owns 80% of its total holding.
In 2018, a ruling was issued in favor of the investor, and Egypt was fined 31 billion Egyptian pounds, that is $2 billion. In 2020, the case was settled between the two sides without announcing the value of the settlement. However, Naturgy announced that it was withdrawing from Unión Fenosa, in return for compensation from the Egyptian government amounting to 9360 million Egyptian pounds or $600 million dollars. This is in addition to seizing the company’s assets (Unión Fenosa) outside Egypt, with a value of 4680 million Egyptian pounds, that is $300 million dollars.
Eni, on the other hand, increased its share in the Damietta Liquefaction Plant from 40% to 50% to enhance its position in the European market. During March 2021, work at the Damietta Liquefaction Plant resumed after an eight-year hiatus.
It is important to note here that a human rights report entitled “the corruption of gas contracts during Mubarak’s presidency” had criticized the Egyptian government for concealing the value of gas sales contracts to foreign companies, including the contract with Unión Fenosa before its dissolution, and the same goes according to the report for many long-term contracts concluded between the Egyptian government and other foreign parties.
We contacted Hamdi Abdel-Aziz, spokesman for the Egyptian Ministry of Petroleum, to enquire about the accountability mechanism that resulted in settling the dispute with foreign investors concerning the international platform and whether old and new contracts would be reviewed to prevent a recurrence of these issues, but he did not respond.
Appeals against Privatization
A similar incident involved a privatization contract that was rendered invalid due to the cancellation of the sale of a public sector company. The dispute between the foreign investor and the state of Egypt led to filing ICSID arbitration case No. ARB/11/32 in 2011 by the Indonesian company, Indorama. This came after a ruling by the administrative court invalidating the contract between the company ‘Misr Shebin El-Kom Spinning Factory’ and an Indonesian investor.
The Indonesian investor who owns 70% of Shebin Spinning Factory demanded that the Egyptian government pay them $156 million in compensation. By 2015, the government reached a settlement to pay the Indonesian company just $50 million, despite the fact that the purchase value of the Egyptian public sector company did not exceed 16% of the settlement amount.
In 2018, the company re-surfaced on the Egyptian market and announced that it had acquired the Egyptian Indian Polyester Company. On its website, Indorama stated that this would enable the Egyptian company to boost its production capacity by 10%.
Invalidating privatization contracts with foreign investors came as a result of lawsuits accusing Egyptian government entities of selling state properties at less than their market value. By 2014, former President of the Republic Adly Mansour issued Decree No. (32) to prevent individuals from challenging contracts signed with foreign investors so as to reduce the number of arbitration cases.
Politics and Media
Political differences were also a factor that caused the filing of arbitration cases against Egypt. In 2016, the Qatari TV channel Al-Jazeera, filed international ICSID case No. ARB/16/1, which is under arbitration. The case alleges that the Egyptian authorities suspended the broadcasting license of the channel in Egypt and closed its offices resulting in losses for the channel estimated at $150 million.
The cancellation was due to the editorial policy upheld by Al-Jazeera Egypt channel called ‘Masr Mubasher’ which the Egyptian government disapproved of. In June 2021, however, the Egyptian Foreign Minister Sameh Shoukry appeared on the channel years after government officials had boycotted it.
In the past decade, the Egyptian State Lawsuits Authority led the defense of the Egyptian side in arbitration cases at ICSID and sometimes recruited the help of foreign law firms. Egyptian law firms were completely absent from the litigation scene; for example, the authority did not resort to the Kosheri, Rashed & Riad law firm even though the company had won three arbitration cases for Egypt before 2011.
Law firms representing Egypt after 2011
Reviewing the ICSID data shows that three foreign law firms had the lion’s share in representing Egypt, Bredin Prat, Shearman & Sterling and Eversheds.
The French company Bredin Prat represented Egypt in only 19% of the cases despite winning all the cases entrusted to it during the Mubarak years. Eversheds is a multinational company, and its representation of Egypt in three cases was unexpected since the firm had lost the Siag case in 2005.
Shearman & Sterling is a multinational company based in New York and emerged as a new player in the field of representing Egypt in arbitration cases. It represented the state in 19% of the cases after switching sides from representing opponents of Egypt. Moreover, it represented the country in a number of other cases and in government programs. Last February, a group of veteran lawyers knowledgeable in Egyptian and Middle Eastern law went independent and launched an international law firm in Paris under the name of Gaillard Banifatemi Shelbaya Disputes.
Ignoring the Right to Reply
The investigator had trouble obtaining information about the average fees charged by these offices and the number of cases assigned to them in the Middle East since all three companies failed to respond to questions emailed to them.
The Egyptian Initiative for Personal Rights estimated the average cost of litigation per case at ICSID at $8 million, which means that the average total cost incurred by Egypt during the litigation stage alone for 26 cases filed at ICSID after 2011 may have amounted to $208 million. This is highlighted in a research paper entitled Investment in Countering Justice.
The Egyptian State Lawsuits Authority also refused to respond to questions about the mechanism of selecting law firms that represent Egypt in arbitration cases and what recommendations the authority puts forward while representing Egypt in each case.
The average number of litigations years filed at ICSID against Egypt in the last decade amounted to 44 months. According to the international arbitration website of Aceris Law LLC, this is higher than the average of 39 months for ICSID wherein litigation years ranged from one to nine years per case.
Despite obscuring the value of the settlements of arbitration cases, the initial payment for administrative expenses for a single case ranges from 1.6 million Egyptian pounds, that is $100000 to 2.4 million Egyptian pounds or $150000. The daily cost is 47000 Egyptian pounds or $3000 while the final cost depends on the compensation amount, the complexity of the case, the employment of experts and on the fees paid to law firms.
Arbitration cases against Egypt whose amount of compensations is declared
UNCTAD monitored 40 cases filed against Egypt. The declared amount of compensation demanded by foreign investors in 13 of these is $22 billion, with an average amount of $1.7 billion per case.
In the last decade, Egypt has issued many decisions and has put sets of legislation that would help find quick solutions to settle arbitration cases and prevent these from recurring. The Ministerial Committee for Settling Investment Disputes was founded by Article (85) of Law No. (72) of 2017 and issued the Investment Law. Moreover, article (2) of Resolution No. (2592) of 2020, gave the oversight powers to a committee of the Council of Ministers to supervise contracts concluded with foreign investors.
Article (190) of the 2014 constitution also made it possible for the Highest State Council to review contracts with foreign investors, and it provided for the possibility of reviewing joint investment agreements. Professor of public law Adel Amer points out that this would cover only the new agreements signed after the enactment of the new constitution.
Egypt joint investment agreements according to the signature year
Examining the list of joint investment agreements shows that the Highest State Council remains inactive since the last joint venture investment agreement was signed in 2014.
Meanwhile, the mechanism of holding accountable the entities that caused foreign investors to resort to arbitration remains unclear. Media advisor to the Council of Ministers Hani Younis confirmed that there was no jurisdiction for the Council of Ministers to act on those matters and that this task falls within the remit of committees at the Ministry of Justice.
We did not obtain clear answers about the mechanism of accountability. Referring to the sector of arbitration and international disputes at the Egyptian Ministry of Justice was not helpful either, despite the attempt to communicate with the ministry throughout October 2021.