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Uniting the family: the Pakistan army

Wed, 01 Jun 2011 17:22:28 GMT

Bring any three members of the Ahmed clan together and you'll get five opinions. Of late on the topic of the army, however, there's been increasing unanimity of antipathy.

In this Urdu TV interview with Dunya , Asma Jahangir, a life-time human rights lawyer and the current President of the Pakistan Supreme Court Bar Association, talks about how this is absolutely not the time for the citizenry to stand-by the Pakistani army, and how we have a golden opportunity to bring to an end the looting of the country and fostering of terrorism for which the army leadership has been responsible.

CEO of an investment bank in Dubai and the son of a respected, retired Pakistani General, Ali Nadir Syed, writes in the Daily Times of the need to redirect Pakistan's resources from the army to the people, as does banker-turned-TV anchor Gul Bukhari, daughter of another respected, late Pakistani General.

Publisher and editor of Newsweek Pakistan Fasih Ahmed, Christian Science Monitor correspondent Issam Ahmed and TV Journalist Munizae Jahangir all point to the ISI, Pakistan's secret services agency, for the murder of journalist Saleem Shahzad shortly after he published this report, linking al Qaeda and the ISI.

Korean corporate land acquisition in Madagascar: how the law governs it, and how it ought to

Wed, 27 Apr 2011 00:59:26 GMT

Imaduddin Ahmed

The Fletcher School, Tufts University Graduate School of International Affairs

Executive Summary

In 2009, the government of Madagascar was overthrown for negotiating a seemingly unfavourable deal with Korean conglomerate Daewoo. Of concern to the nation with malnutrition rates as high as 50% were land grabs and food security. The subsequent Malagasy president revoked the deal. Yet despite the bitter experience, Daewoo and the government of Madagascar may still want to consider negotiating for a deal that can better ensure the food security of both nations through Daewoo’s superior farming technologies. A prerequisite to a deal, however, is a legal framework that protects from the Madagascan government the interests of the Malagasy people and the interests of Daewoo. This paper discusses how such a framework can be built with regards to the former, and negotiated with respect to the latter.

‘In the world’s earliest written legal code, dating from 1790BC, Hammurabi, the king of Babylon, laid down rules governing the maintenance of irrigation systems and the amount of water people could take from them. Two generations later, his grandson abandoned this rules-based approach and used the river Tigris as a weapon against rebels in Babylon.

The world is charting a similar course, away from rules governing scarce resources towards conflict over them. For most of the past 50 years, the striking thing about such conflicts is how rare they have been.’

- The Economist[1]

I. The anxieties over land and food security

The law defines where the rights of one party end and the rights of another begin, and in so doing, it governs the relations of the parties relative to one another.[2] Designed with the purpose of development in mind, the law can benefit the poor[3]. Designed well, the law achieves Pareto efficiency.

With a growing global population, diminishing resources and food production levels reaching their peaks in regions of the world[4], competition to secure food, water and energy have been long-term drivers of land acquisition.[5] Notable short-term drivers were the 2007-08 high oil prices and the ban on food exports by 25 countries in 2008, which resulted in the food crisis and drove up prices for land that could be used for agricultural and fuel production.[6]

Remarkably, land acquisition for agricultural land often in happens developing countries with high rates of malnutrition.[7] Between 2004 and 2009, agribusinesses, investment banks, hedge funds, traders and increasingly since 2007, states and sovereign wealth funds from the Gulf States, Asia, Europe and the USA, acquired almost 2.5 million hectares – almost half of the United Kingdom’s arable land – in Ethiopia, Ghana, Madagascar, Mali and Sudan.[8]

With these acquisitions come concerns about “land grabs” from citizens, and a loss of state sovereignty in terms of ability to control the amount of food exported, the water used by foreign investors or the ability to limit the negative environmental impact.

But while the trend of land acquisition may be new for a post-colonial free-market world, the laws governing it are not. How do they balance the interests of foreign investors and their home countries with those of the host country, its citizens and its environment? How can the law create a win-win situation for states and investors seeking to secure food, water and energy, as well as for host states and their citizens?

This paper will examine the primary interests at stake with regards to foreign investment in land, the greater social need for such investment within the agricultural space in particular and how international as well as domestic law govern the competing interests. Finally, this paper will recommend changes in the law in order to optimise returns to society.

II. Foreign land acquisition: the interests at stake

Those whose interests are at stake when it comes to foreign investment in land are the citizens of the host country of foreign investment, the host state, the foreign investor and the home state of the foreign investor.

The foreign investor will want the law to protect its property and to minimise non-commercial, as well as commercial, costs. It will want the host state to protect its assets, tangible and intangible, will want ‘just’ treatment, will want to manage its assets unimpeded (including their dissolution, export and the repatriation of dividends in whatever currency it wishes). It will not want its assets to be seized by the state either outright, or more insidiously by having the state transfer its profitability to itself through regulation or by hiking taxation rates, utilities rates, export or exchange rate tariffs. Should expropriation occur, or should the investor’s assets suffer damage due to the state’s acts or omissions, the investor will want timely and fair compensation.

Since the home country of the investor stands to benefit from profits that are repatriated, the home country’s interests will align with those of the investor.[9] Additionally, in the case of land acquisitions, an increasing number of Gulf and Asian states are using funds to secure a steady stream of food and fuel[10], and to protect their limited sources of water.[11]

Host countries too need to ensure that they are able to provide for their population’s nutritional and energy needs. They will not want investors to abuse their resources, wanting their guests to pay for what they use. They will not want their guests to damage the environment, not only for the sake of the environment itself, but for the health and safety of citizens, as well as for the reason that harm to the environment can limit the value and economic productivity of the state. The host state will want to limit the investor’s legal entitlements as far as it can – the investors’ rights limit the state’s discretion to do as it sees fit (in the public interest, or otherwise). At the same time, the host state will want the investor’s capital and a share of the profit stream that the investor generates. In the particular case of agricultural investment into countries suffering high rates of malnutrition, the host government will hope for a share of the exponentially increased agricultural produce equal to or above the produce its farmers were previously able to harvest due to technological arbitrage. The government will therefore recognise that it will need to offer the investor a minimum threshold of rights, as well as build a reputation for abiding by domestic and international laws, and by its contractual obligations. It will also recognise the need to create a stable, ordered environment. Ergo, were the host country to push hard to limit the protections of the investor, it should reasonably expect a lower share of the produce during normal times, just as it would expect a lower share of the produce were it to charge a higher premium for rent or for leasing.

Inherent in the negotiations between the investor and the host state is a trade-off. Where laws and regulations are skewed in favour of the host state, but still not so bad that the investor will abstain, the investor will make the host country pay more for investment capital.[12]

Citizens of the host state will have interests less aligned with their state than will the foreign investor with its home state. What may in the mind of bureaucrats and politicians of the host state be a beneficial exchange for the state’s population at large (if not themselves personally[13]) may not be beneficial, or as beneficial, for individual citizens who give up their land, either voluntarily or forcibly. Particularly in countries with unsecured land rights, citizens will fear not being adequately compensated for the land by their own home state,[14] and will be outraged if their government sells their land at a substantial mark-up. They will fear poverty if all they knew was farming and they are unable to gain employment with the new land owners. Even if they do gain new employment with a less volatile stream of income, if there is less food in circulation in the domestic market and the price of food increases, they will rightly fear whether they will be able to afford to feed themselves to the level that they were able to before (which was not much).[15] They will also fear estrangement from their ancestral lands and their patrimony[16] and fear desecration of their worship sites.[17]

IIIa. The law governing relations between the home state and its people: a look at Madagascar

In March 2009, civilian protestors, backed by the military, saw the overthrow of the Madagascan president. The president’s usurpers claimed that a deal he had made leasing over half of the island nation’s arable land[18] for 99 years with South Korean conglomerate Daewoo lacked transparency[19] and consultation of the affected Malagasy population.[20] Existing farmers would not have been compensated and all the food would have been exported. [21] In exchange, Daewoo would provide employment[22] and pay the government $6 billion.[23]

In a country where nearly 50 percent of people suffer chronic malnutrition[24], the explanation given by Hong Jong-Wan, a Daewoo manager, for wanting to export all harvests to other countries or to Korea, “in case of food crisis”, would not have helped: “Food can be a weapon in this world.”[25]

After the Malagasy president’s ouster, his replacement, Mr Andry Rajoelina, cancelled the agreement with Daewoo, forwarding, in the court of the media, the argument that, “We are not against the idea of working with investors, but if we want to sell or rent out land, we have to change the constitution, you have to consult the people.” [26]

There seems to be some confusion as to what exactly Mr Rajoelina said and meant. The BBC interpreted his words to mean that Madagascar’s constitution did not allow for the rent or sale of land.[27] This statement would have been factually incorrect.[28]

The more judicious interpretation as stated above could conceivably have validity. If customary tenure could be interpreted as holding legal rights over land –in the case of Magaya v. Magaya, the Supreme Court of Zimbabwe upheld the importance of customary law[29] – then the constitution did provide legal recourse to small-hold farmers with land under customary tenure. Article 34 of the pre-Rajoelina Constitution provided that the state shall guarantee the right to private property and not deprive people of it except for public use and with fair compensation. Article 35 stated that a village council of elders may take appropriate measures to prevent a loss of land or of ceremonial heritage, unless their intervention jeopardised the common interest or public order. [30]

This case having involved a prevention of loss of land and arguably too a loss of ceremonial heritage[31], Article 35’s provision, ‘may take appropriate measures’ and caveat of ‘common interest and public order’ are sufficiently vague enough to entertain the possibility that in fact an ouster of the incumbent government which sold the people’s land without their consultation could have been legally permissible. Whether or not it was would be up for a court of law to decide, but the point is that the Constitution allows for action first and a judicial decision second, as opposed to the other way around.

We will look at how Mr Rajoelina’s cancellation of the Daewoo deal would have held up in international law in section IV.

IIIb. A better domestic legal system for Madagascar

Clearly what happened in Madagascar was a farce, both in the way the government was going to llegedly seize land without compensating its traditional owners, and for the extra-judicial response. The legal recourse to an alleged abrogation from the Constitution by the state cannot be a coup. The Constitution must allow for courts of law to decide whether there has been a wrongful taking of land or destruction of ceremonial heritage, and then decide upon the appropriate measures to be taken should they be required.

The first step to achieving this is by creating a conflict resolution system within a legal framework. Venues for conflict resolution and their authority should be defined, the public should be aware of these and find them accessible and navigable, the conflict resolution system must publish its court proceedings in order to ensure transparency and faith in such a system, the system should process appeals and should ensure timely compliance with rulings.[32]

To make palpable state seizures of land that transfer the land of farmers to other private entities,

1) The home state must establish legal processes by which it will allow itself to seize private land:

a. It must convince a court that it has exhausted exploring alternative ways of meeting a public[33] need without transferring the private land. (In the case of Madagascar, we will explore below how securing land tenure may have achieved the public need of increasing Madagascar’s land productivity and decreasing it incidence of malnutrition.)

b. It must pay the landowner full market-based compensation at the time of the taking, or earlier, and the relevant court must determine that the amount stipulated is sufficient.[34]

c. The process should provide sufficient notification to the affected parties and allow them to participate in the hearings and other procedural steps. [35]

2) The home state must bind itself to ensuring that those whose land is sold have means by which to sustain themselves, and in a manner no less better than by which they were living. This could mean for illiterate arable farmers jobs with no skills other than farming

a. Training and state jobs

b. Guaranteed employment with the new landowners as farmers

Taking into consideration the emotional ties of the Malagasy people to their ancestors’ land[36] it is by no means a given that a transfer of native land to Daewoo is the optimal manner by which the government of Madagascar could improve the productivity of its land and reduce the incidence of malnutrition.

Reports The Christian Science Monitor, a lot of land was left unused, the soil quality was depleted by slashing and burning forests to make way for fields and by conservative farmers growing the same crop in it year after year, and farmers failed to invest in their land or in improving their techniques because they feared that they could be moved off of their land at any time (as they were).[37] It is worth exploring then, whether a clarification of citizens’ property rights under the law and whether educational farm programmes would achieve the public need as well as Daewoo with its highly capital and technology intensive farming techniques.

There are six expected benefits to securing land tenure [38] [39] [40] [41] [42] [43] [44]:

i) higher incentives for investing in the land

ii) decreased likelihood of the use of ‘slash and burn’ techniques to convert forest into readily usable (but for a short period of time only) agricultural land and hence slower depletion of soil

iii) sounder environmental practices by virtue of i and ii

iv) increased likelihood of land transfers to more productive producers (since to them, the value of the land would be higher, they would pay a price higher than the current owner’s reservation price) and development of the non-agricultural economy (this would therefore also make transferring land to Daewoo simpler)

v) improved access to formal credit by the ability to use the land as collateral (some of this credit could be used to purchase machinery which would also make the land more productive)

vi) decreased likelihood of land seizures and better overall governance

Indeed, Klaus Deininger and Jin Songqing of the World Bank Development Research Group show empirically that in Ethiopia, a country which also suffers from high levels of tenure insecurity, an increasing population and environmental degradation, the investment-enhancing impact of greater tenure security and transferability is ‘surprisingly large’.[45]

In 2004, the World Bank showed that farmers in Thailand borrowed up to five times more from lenders than farmers with similar land but without title.[46] It also found that “a modest improvement in the protection of property rights could reduce the rate of deforestation by as much as one-third.”

Even if Daewoo were to prove the better option, securing citizens’ land rights and enhancing their farming techniques would improve the Madagascan government’s Best Alternative To A Negotiation Agreement, and hence improve its negotiating power vis-a-vis Daewoo, such as making sure that not all the food is exported, and that the landowners whose land is transferred are employed by the company.

How then to clarify the citizens’ property rights? Again, we revert to Leonard Rolfes, who argues that the way forward is by formalising claims through documentation which is accessible to outsiders.[47] The prevalent systems by which this works in the West is by title registration (Europe, Australia, Canada) or by deed registration (United States).

Rolfes anticipates pitfalls, namely disputes over claims to the same land. These, he suggests, can be resolved through special processes in a way that the affected parties will accept as legitimate and will use, and can be rooted in customary norms.[48] The system must, of course, convert into formal property the land rights that exist in practice, though they may not be provable by chains of title or other conventional means. [49] It must be low in cost, navigable and physically accessible to poor people. [50] Too, there must be a process by which the poor can bring decisions to the courts for judicial review should the well-connected attempt to usurp their rights.

Once titles (or deeds) have been established, their transferability must be defined. The legal framework, Rolfes explains, must recognise the principle of ‘freedom of contract’[51]; define provisions on obligations, their termination and remedies for failing to fulfil them (such as an obligation to transfer land ownership for the benefit of another person, and such as the obligation’s fulfilment, or a settlement if fulfilment is not possible); provide rules on how to conclude a contract; and provide rules for when a transaction will be considered invalid (such as fraud or coercion), in order to protect the poor from domineering interests. Also, inheritance law must be drafted in a way that reconciles the formal law with customary norms. [52]

IV. The law governing relations between home states and foreign investors: how Daewoo, Korea and Madagascar ought to negotiate

Mr Rajoelina cancelled Madagascar’s agreement with Daewoo. Would Daewoo have had a case to make for compensation? Given that it seems that Daewoo had not yet paid the Madagascan government the $6 billion in consideration for the 99 year lease;[53] given that the there was – gallingly – no Madagascar-Republic of Korea Bilateral Investment Treaty (BIT)[54] that would have given an international investment tribunal grounds for arbitrating, and if it is the case that Madagascar does not have laws in which a tribunal could find international law principles[55], then Daewoo would have had to have provided in its contract with Madagascar a provision that called for international arbitration, and further, Daewoo would have had to have ensured that ‘investment’ was defined broadly enough[56] in the contract so that it included pre-investment expenditures,[57] Daewoo could then have sued for pre-investment costs and, even more optimistically, for the loss of expected future profits, under international customary law.

International customary law is wrought with controversy, and there is a split between the South and the North on the matter of what standard should be used to judge for compensation. Much of Latin America, for instance, adopts the view that property within its territory is subject only to domestic laws.[58] In the absence of ‘Calvo clauses’ in Madagascar’s legislation or in the contract calling for international arbitration to decide according to Madagascar’s domestic laws, [59] the North’s Hull doctrine would likely be adopted by a tribunal. It calls for ‘prompt, adequate and effective compensation’, and has found traction in De Sabla, where a tribunal found that the expropriator would be liable for the ‘full value’ of property and in the case of Chorzo´w Factory, which set down, albeit indirectly, criteria for the ‘value of the undertaking at the moment of dispossession, plus interest to the day of payment’.

After the tribunal decided upon a standard of compensation, it would have to choose an appropriate valuation technique for working out the level of compensation. Tribunals can use discounted cash flows, the book value of the company, the replacement or liquidation cost. In Daewoo’s case, without a history of earnings, a tribunal would be unlikely to use DCF,[60] and without a company having been set up in Madagascar, the book value method would not be applicable either. At most, then, Daewoo could hope for a recuperation of its pre-investment costs. This amount may not justify the costs of taking Madagascar to court, which is possibly why Daewoo has not.

Going forward, suppose that Madagascar were to develop the perquisite to foreign investment – an appropriate domestic legal framework as described above; that it found that Daewoo’s investment could add value were a better contract negotiated vis-a-vis its own food security and the employment of its farmers who once had tenure of the land; and that it found that Daewoo would be amenable to such a contract. (Given the hysteria about Daewoo’s previous attempt, this would also likely involve Daewoo paying Madagascar a monthly rent for the land, which it would not have paid,[61] rather than a lump sum in the beginning that can be squandered by a corrupt government. Less land would likely be acquired, and for a shorter duration.) The first thing Daewoo would want to do, to have more control over its fate under international law than customary international law would afford it, would be to have its government sign a BIT with Madagascar’s.

Then, the law governing Daewoo’s investment in Madagascar would be governed by Madagascar’s domestic law, the Republic of Korea-Madagascar BIT (no other multilateral treaties exist between these countries) and the contract between Daewoo and Madagascar.[62] consider the writings of ‘highly qualified publicists’ (academics) in deciding what to decide in accordance with international law.[63]

When a state decides to enter a treaty with another, it cannot use violation of existing domestic law[64], regional land use and urban planning regulations[65] or even legislation subsequent to the signing of the treaty[66] as excuses to recuse itself from its treaty obligations without compensation to the investor.

With a BIT, the standard of compensation for expropriation would be as is stated within it. The BIT negotiated between Bangladesh and the Republic of Korea in Article 5(1) serves as a model that Daewoo would wanted emulated for a BIT with Madagascar, imitating, as it does, wording of judgments made within international customary law based on the Hull doctrine:‘[C]ompensation shall amount to the market value of the investment expropriated immediately before the expropriation or impending expropriation becomes public knowledge.’[67]

When it comes to compensation for losses owing to armed conflicts, revolutions and national emergencies,[68] South Korea’s past BITs have limited the amount of compensation its companies or nationals can seek. In its BITs with Pakistan and Bangladesh, it explicitly opted for national treatment. [69] This could conceivably be, or become, nothing. In Article 3(2) of these BITs, it has called for the ‘most constant protection and security’ of nationals or companies in the territory of the other contracting party without specifying whether failure to provide this shall result in compensation.

Other countries have, through their wording in their BITs, called for a more objective ‘minimum standard’ of compensation. These BITs require that their national’s or company’s investments not ‘be accorded treatment less than that required by international law’ and demand full protection and security. The standard for compensation when relying on this wording within a BIT has been decided in international customary law

· as covering ‘any financially assessable damage, including loss of profits in so far as it is established’ by Article 36(2) of the United Nations International Law Commission’s Draft Articles on the Responsibility of States for Internationally Wrongful Acts (2001).[70] The International Court of Justice has cited an earlier draft text of the Articles.[71]

· or as wiping out as far as possible ‘all the consequences of the illegal act and re-establish the situation which would in all probability have existed if that had not been committed’ in the Chorzow Factory Case.[72]

The Republic of Korea is short-changing its companies with the wording it has used in past BITs. Going forward, it will want to negotiate a BIT with Madagascar that will afford Daewoo a higher standard of compensation should its operations be impaired by a lack of host state protection and security for an undefined number of reasons.

In the cases of CME Czech Republic v Czech Republic, Azurix v. Argentina and of Siemens v. Argentina, ‘full protection and security’ was interpreted as extending beyond mere physical security, but also to the country’s regulations of the investor’s industry, and of legal security. Suez, Sociedad General de Barcelona S.A., and Vivendi Universal S.A. v. Argentina made clear that ‘full protection and security’ did not extend to responsibility for a stable commercial environment, but also made unclear whether the clause would be upheld to mean a stable legal environment by future tribunals.[73]

The call for ‘full protection and security’ coupled with treatment accorded to investments no less than that required by international law is not, however, the only way to safeguard against harmful regulation or legislative change[74] without compensation.

Daewoo could explicitly sign into contract with Madagascar the resources it would want access to, the pollution it would need to be allowed to make, and the permits it would require. Korea, for its part, ought to negotiate in the BIT for the necessary permits to be issued once a foreign investment has been approved.

The effect of the BIT provision would be to write in international law Madagascar’s obligation to issue the permits, which would supercede its national laws, unless the violation of the national law were ‘manifest’ and concerned a rule of domestic law ‘of fundamental importance’.[75]

In MTD Equity v Chile, the international investment tribunal, relying on a most favoured nation provision[76] in the Malaysia-Chile BIT (also present in the Korea BITs with Pakistan and Bangladesh), held that Chile breached its obligation to provide fair and equitable treatment (provided for by the Korean BITs) to the Malaysian firm. MTD had received approval by the Chilean government to build a satellite city, but national and local authorities had subsequently deemed the approved project to be a violation of land use and urban planning regulations and refused to issue permits. Based on BITs negotiated with Denmark and Croatia, and based on Malaysia’s most favoured nation status, the Chilean government ought to have ensured that the permits were issued once it approved the investment.

Arguments of ‘creeping expropriation’[77] could also help Daewoo and Korea protect their interests against Madagascar. In Metalclad Corp v. United Mexican States, a U.S. waste-disposal company won its case against the government of Mexico for not having overturned a state government ecological decree and for not forcing a municipal agency to grant permits, that prevented Metalclad from operating its project, which it had been invited to initiate by Mexican officials, and which had met all Mexican legal requirements at the time.

In addition to arguments of ‘creeping expropriation’ Ethyl Corp. v Canada demonstrates that Daewoo might be able to protect its interests by citing discrimination rather than national treatment, and for hindering performance requirements (with the requisite clauses provided for in its negotiated BIT). Ethyl Corp. was able to get compensation for legal fees and damages from the Canadian government, as well as a reversal of laws that banned the import (rather than use)[78] of MMT on the grounds that banning imports discriminate against foreign investors, and that this would likely constitute a violation of Articles 1102 on national treatment, 1106 on performance requirements and on 1110 on expropriation of NAFTA, given that the Canadian government was unable to sufficiently prove the harm that MMT caused to the environment and to health. The Canadian government went as far to sign a letter stating that MMT is not known to be hazardous.

Metalclad and Ethyl Corp do not mean, however, that the Madagascan government would not be able to impair Daewoo’s operations on the grounds of environmental damage per se. In the first case, the mistake of the government was to contract with a company that invested to its detriment, without providing for its ability to do business. In the second case, the host government’s shortcoming was its inability prove harm and its choice in legislative language was indeed discriminatory. Were Madagascar to negotiate in a BIT with Korea a clause to protect its environment, such as what is present in the US-Uruguay BIT[79], there most likely would be scope for it to implement regulations that would limit Daewoo’s environmental degradation under international investment law were it able to prove that a) Daewoo was indeed causing environmental degradation and that b) preventing Daewoo from doing so would not prevent Daewoo from doing what it was in Madagascar to do, and – perhaps – as profitably as it could do otherwise and that c) the regulations were applicable to all farmers, regardless of nationality.

For its part, Korea would want to accede to a BIT article providing for the protection of the environment and Daewoo would want to hold itself to high environmental standards given the level of political awareness and mistrust among the Malagasy people. It would show that Korea and Daewoo come in good faith, with the intention of adding, rather than negating, value to Madagascar.

The Madagascan government would likely find itself on the wrong side of an international tribunal on the grounds of national treatment, fair and equitable treatment, performance requirements and expropriation were it to change radically the tariffs on water or electricity. The same would be true of preventing Daewoo from exporting food, for which there is also a BIT provision in the Bangladesh-Korea BIT, Article 6, which provides that each state shall guarantee ‘the free transfer of the capital of, and the returns from, their investments, subject to its right to exercise equitably and in good faith powers conferred by its laws’. It would be for the Madagascan government to negotiate with Daewoo what percentage of produce could be exported, or to apprise Daewoo of the tax-rate that it intended to impose upon exports at the time of the contract, to avoid later allegations of creeping expropriation.

With food security at the crux of Daewoo’s investment thesis, is there a way for Madagascar to protect its own, should one year there be a poor crop yield? Would Madagascar be able to stop the necessary amount of food exports to prevent famine among its own people?

The hope is that Daewoo’s agricultural technology would increase the size of the proverbial pie, so that hypothetically Madagascar could receive a slice no smaller than what it had before Daewoo’s investment. A contract could stipulate that Madagascar receive no less than a specified absolute amount, and if the yield is less than that amount, Madagascar keeps all. It is difficult to see why, with the political situation in Madagascar as it is, the government would agree to a standard of anything less. Daewoo then would be incentivised to really add value to the land, so that it could repatriate the excess to supplement, and it would enter such an agreement if this were its best option – farmable land is, afterall, a finite resource.

With such an provision in place, or with an agreement to put such a provision in place subsequent to the signing of a BIT, Daewoo would want Korea to negate explicitly in its BIT with Madagascar Madagascar’s ability to invoke the customary international legal doctrine of necessity,[80] which would allow Madagascar to fail to meet its treaty obligations without needing to compensate Daewoo, the investor, as was held in LG&E v Argentina, were it able to prove that its abdication of the responsibility was a matter of necessity.

The scope for invoking the doctrine of necessity in international customary law seems at first blush tight.[81] However, it would be comforting for Daewoo and Korea to know that some tribunal in the future would not take advantage of its ability to go beyond the confines of previously decided cases to broaden the scope for the doctrine, as LG&E v Argentina did in deciding that Argentina’s financial crisis constituted a threat to the state’s ‘essential interest’, when just 18 months earlier, on virtually the same facts, CMS v Argentina had reached the opposite decision.[82] Daewoo would want in a BIT provision the exclusion of the doctrine of necessity for the same reason it would want inclusion of the standard of compensation for expropriation: predictability and protection from the mercurial international customary law.

- - -

It would be premature to dismiss out-of-hand the prospect of Daewoo and Madagascar becoming future partners in business. They both have something that the other desires: one has capital and technology, the other land. Together, they have better factors of food production. If together their factors can combine to improve the food security of both Korea and Madagascar, the only thing left remaining is a legal framework that defines and protects the rights of the Malagasy people and Daewoo. Once this is established in a way that makes sense for all parties, the costs of doing business will be lower, and the benefits and possibility of doing business together will be higher.

[1] “The Madagascar Model: Conflicts Over Natural Resources Will Grow”, The Economist, November 13, 2009 http://www.economist.com/node/14742547?story_id=14742547&d=2010

[2] ‘One person's legal obstacle are another's protection [ . . . I]t is important to balance the benefits and costs of retaining [law-related obstacles] against the benefits and costs to be derived from new investment. Such balancing of interests is of course the traditional job of the law.’ J.W. Salacuse, “Direct Foreign Investment and the Law in Developing Countries,” ICSID Review-Foreign Investment Law Journal 15 (2000): 382-400.

[3] ‘Law reform has an important role to play in the ability of land markets to bring economic benefits to poor people,’ argues Leonard Rolfes. Leonard Rolfes Jr., "A Framework for Land Market Law with the Poor in Mind," in

Land Law Reform: Achieving Development Policy Objectives, ed. John W. Bruce et. al. (The World Bank, 2006), 107.

[4] Paul Brown, “Global Warming: The Last Chance for Change”, A Reader's Digest Book, Dakini Books: (2007): 224-225.

[5] According to a UN report, these are the main drivers for the private sectors in Europe, USA and Asia, as well as the public sector in Asia. Food and water scarcity are the main drivers of land acquisition among Gulf states. “Food Land Purchases for Agriculture: What Impact on Sustainable Development?” Innovation Brief, Volume 8, New York: United Nations Department of Economic and Social Affairs, January 2010. http://www.un.org/esa/dsd/resources/res_pdfs/publications/ib/no8.pdf

[6] ‘The value of both food and fertile land seemed set to increase, making them an attractive new investment. Indeed, a number of investment banks have set up agricultural investment funds, including BlackRock (U.S.), Deutsche Bank (Germany), Goldman Sachs(U.S.), and Knight Frank (UK).’ “Food Land Purchases for Agriculture: What Impact on Sustainable Development?”

[7] ‘[M]any of the countries that are leasing large tracts of land to foreign investors also have some of the highest percentages of undernourished people in the world, including the Democratic Republic of Congo (76%), Ethiopia (46%), Kenya (32%), Madagascar (37%), Mozambique (38%), Sudan (21%), and Tanzania (35%). In 2008, some of these countries imposed restrictions on food exports in response to the massive spike in agricultural prices and the internal food security issues this created,’ says a report published by the United Nations. “Food Land Purchases for Agriculture: What Impact on Sustainable Development?” 6

[8] Lorenzo Cotula, Sonja Vermeulen, Rebeca Leonard, James Keeley, Land grab or development opportunity? Agricultural investment and international land deals in Africa, (IIED, FAO, and IFAD, June 2009), 4

http://pubs.iied.org/pdfs/12561IIED.pdf

[9] Indeed as much was said by the Permanent Court of International Justice in the Mavromatis case:

‘By taking up the case of one of its subjects and by resorting to diplomatic action or international judicial proceedings on his behalf, a State is in reality asserting its own rights.’ Mavromartis Palestine Concessions case (1924) PCIJ Ser A, No 2.

[10] Players include the government of China and its ZTE International and Chongqing Seed corporations, South Korea and its conglomerates Daewoo and Hyundai, India, the Saudi Hail Agricultural Development Corporation, the Saudi Bin Laden Group and consortium of agricultural and food products companies Jenat, the Abu Dhabi Fund for Development, the Dubai-based private equity fund Abraaj Capital, Dubai World Trading Company, Bahrain, Qatar and Kuwait. Joachim von Braun and Ruth Meinzen-Dick, International Food Policy Research Institute, April 2009.

[11] The Gulf states use around 80 percent of their total water supply for agriculture. In 2008, Saudi Arabia established a new agricultural fund whose prime concern includes preserving water by investing in agriculture abroad. In contrast, sub-Saharan Africa uses only 2 percent of its freshwater resources for irrigation. "Food Land Purchases for Agriculture: What Impact on Sustainable Development?"

[12] Salacuse, “Direct Foreign Investment and the Law in Developing Countries,” 382-400.

[13] The Corruption Perception Index rankings of recipients of foreign investment in large tracts of land tend not to be high. Other than Ghana, Mali, Ethiopia, Madagascar and Sudan – the nations mentioned above as target countries for foreign land acquirers – rank within the 70 most corrupt countries. “Corruption Perceptions Index”, Transparency International, 2010, http://www.transparency.org/policy_research/surveys_indices/cpi/2010/results

[14] Leonard Rolfes Jr., "A Framework for Land Market Law with the Poor in Mind."

[15] See earlier references to the malnutrition rate in Madagascar being up to 50%.

[16] This is not limited to developing countries, as Salacuse reminds us: ‘Even in the U.S. [ . . . ],the purchase by Arab interests of agricultural land in the West and mid-west and the acquisition by the Japanese of Rockefeller Center in New York, provoked outcries about the need to protect the national patrimony from foreigners.’ Salacuse, “Direct Foreign Investment and the Law in Developing Countries,”12.

[17] Tribal forest dwellers in the Indian state of Orissa have fought to prevent Vedanta Resources, a London-listed multinational, from mining bauxite from a mountain on which their holy site is based. Mehul Srivastava, “For Tata in India: Industry vs. Farms,” Bloomberg Businesweek, August 27, 2008, http://www.businessweek.com/magazine/content/08_36/b4098000380054.htm

[18] 3.2 million acres

[19] “There was no process. The head government official of the region just received an order from the president of the country to help the Korean people to find the most fertile land. That was it,” Hajo Andrianainarivelo, Madagascar's new minister for land management. You can't do that in Madagascar." Scott Baldauf, “Hunger and Food Security: Is Africa Selling the Farm?” Christian Science Monitor, February 6, 2011,

http://www.csmonitor.com/World/Global-Issues/2011/0206/Hunger-and-food-security-Is-Africa-selling-the-farm/%28page%29/4

[20] "We are not against the idea of working with investors, but if we want to sell or rent out land, we have to change the constitution, you have to consult the people. So at this hour the deal is cancelled." President Andry Rajoelina. “Madagascar Leader Axes Land Deal,” BBC News, March 19, 2009, http://news.bbc.co.uk/2/hi/africa/7952628.stm

[21] November 13, 2009 “The Madagascar Model: Conflicts Over Natural Resources Will Grow.”

[22] Song Jung-a, Christian Oliver and Tom Burgis, “Daewoo to cultivate Madagascar land for free,” Financial Times, November 19, 2008, http://www.ft.com/cms/s/0/6e894c6a-b65c-11dd-89dd-0000779fd18c.html#axzz1KIE5t4mx

[23] Baldauf, “Hunger and Food Security: Is Africa Selling the Farm?”

[24] Ibid.

[25] Daewoo to cultivate Madagascar land for free, By Song Jung-a and Christian Oliver in Seoul, and Tom Burgis November 19 2008 http://www.ft.com/cms/s/0/6e894c6a-b65c-11dd-89dd-0000779fd18c.html#axzz1KIE5t4mx

[26] Jung-a, Oliver, and Burgis, “Daewoo to cultivate Madagascar land for free.”

[27] “Madagascar Leader Axes Land Deal.”

[28] Constitution of Madagascar, Adopted August 19, 1992, http://www.servat.unibe.ch/icl/ma00000_.html

[29] Magaya v. Magaya, Supreme Court of Zimbabwe, 1999, [1999] LRC 35.

[30] Constitution of Madagascar.

[31] "Land is holy. Land that I inherited from my ancestors – I couldn't sell it, because even now, after they died, it still belongs to them. They are watching what I am doing with the land. So I will do what they have done for me. I will pass my land along to my family, too,” says Mr Rajaonary. It is difficult to tell, tucked away in the bowels of a Medford, MA library, whether these are the words of a tin-pot usurper justifying his actions, or whether these candidly represent the sentiments of his people. Baldauf, “Hunger and Food Security: Is Africa Selling the Farm?”

[32] “A Framework for Land Market Law with the Poor in Mind.” p.118

[33] Ibid.

[34] Ibid.

[35] Ibid.

[36] Ibid.

[37] Ibid.

[38] Klaus Deininger and Songqing Jin, “Tenure security and land-related investment: Evidence from

Ethiopia,” European Economic Review 50(5): 2006, 1245-1277.

[39] Kenneth W. Dam, “Land, Law, and Economic Development”, John M. Olin Law & Economics Working Paper No. 472, University of Chicago: January 2006.

[40] M.M. Ahmed, “Measurement and sources of technical efficiency of land tenure contracts in Ethiopia”, Environment and Development Economics 7(3):,2002, 507–527.

[41] B. Debele.,“Land tenure in Ethiopia. Background paper for GTZ-DSE Training Course on Community-Based Land Use Planning for Rural Development,” GTZ Project Land Use Planning in Oromia, Addis Ababa: 2002.

[42] A. Haileselassie, “Ethiopia's Struggle Over Land Reform”, World Press Review 51(4): 2004, 51–55.

[43] Associates for Rural Development, 2004. “Ethiopia land policy and administration assessment.” Report submitted to USAID Ethiopia, Addis Ababa.

[44] Lee J. Alston, Gary D. Libecap, and Bernardo Mueller,.Titles, Conflict, and Land Use: The Development of Property Rights and Land Reform on the Brazilian Amazon Frontier. Ann Arbor: University of Michigan Press: 1999.

[45] Deininger and Jin, “Tenure security and land-related investment: Evidence from Ethiopia.”

[46] Ibid.

[47] Leonard Rolfes Jr., "A Framework for Land Market Law with the Poor in Mind," pp.-117-118

[48] Ibid.

[49] Ibid.

[50] Ibid.

[51] Allowing a person to enter a contract with a person of his choice and to establish rights and obligations by mutual agreement and not contrary to law by contract.

[52] Leonard Rolfes Jr., "A Framework for Land Market Law with the Poor in Mind," pp.118-125

[53] The Christian Science Monitor reports ‘Daewoo would pay Madagascar $6 billion to grow corn and oil palm.’ I have found no reference to the transaction having been executed, or in Daewoo having invested in the land granted it. Baldauf, “Hunger and Food Security: Is Africa Selling the Farm?”

[54] United Nations Conference on Trade and Development BITs online search tool, http://www.unctadxi.org/templates/docsearch____779.aspx

[55] In Southern Pacific Properties (Middle East) Limited [SPP(ME)] v Arab Republic of Egypt (11 March 1983) ICC Award No YD/AS No 3493; 22 Int’l Legal Materials (1983) 752 ¶ 49, the tribunal found that ‘International law principles such as “Pacta Sunt Servanda” and “Just compensation for expropriation measures” can be deemed as part of Egyptian law’.

[56] The model definition used in the Republic of Korea-Bangladesh BIT would suffice. It is similar in scope to the definition used in the US-Sri Lanka BIT, referred to in the following footnote. Both BITs also include intellectual property as an investment

[57] WB Hamida, ‘The Mihaly v Sri Lanka Case: Some Thoughts Relating to the Status of Pre-investment Expenditures’ in T Weiler (ed), International Investment Law and Arbitration: Leading Cases from the ICSID, NAFTA, Bilateral Treaties and Customary Law (2005) 64-6

[58]The view was famously put forth by the Argentine jurist and foreign minister Carlos Calvo. Jeswald W. Salacuse, The Law of Investment Treaties, Chapter 3, “The Foundations of International Investment Law,” 49 (2010).

[59] Such a clause may look like this: ‘Property, whoever may be the owner, is governed exclusively by the laws of the Republic and is subject to the taxes, charges and limitations established in the laws themselves. The same provisions regarding property applies to aliens as well as [nationals], except that in no case may said aliens make use of their exceptional position or resort to diplomatic appeals.’ R Fitzgibbon, Constitutions of the Americas (1948) 670, citing Art 31 of the 1933 Constitution of Peru. I have not found the clause’s presence in Madagascar’s constitution

[60] In Metalclad Corp. v. United Mexican States, Metalclad was awarded compensation for its costs for developing the landfill, but not for the value of the operation.

[61] November 13, 2009 “The Madagascar Model: Conflicts Over Natural Resources Will.”

[62] The International Court of Justice, which arbitrates between states that are party to a treaty, also considers the writings of ‘highly qualified publicists’ (academics and jurists). Statute of the International Court of Justice, Article 38(1), http://www.icj-cij.org/documents/index.php?p1=4&p2=2&p3=0#CHAPTER_II

[63]

[64] ‘A State may not invoke the fact that its consent to be bound by a treaty has been expressed in violation of a provision of its internal law regarding competence to conclude treaties as invalidating its consent unless that violation was manifest and concerned a rule of its internal law of fundamental importance.’ Vienna Convention on the Law of Treaties, Article 46(1), 1969, www.iilj.org/courses/documents/NoteonInvalidityoftreaties.pdf

[65] MTD Equity Sdn Bhd & MTD Chile SA v Chile, ICSID Case No ARB/01/7 (Award) (25 May 2004)

[66] NAFTA Chapter 11 Arbitral Tribunal: Ethyl Corporation v The Government of Canada (Award on Jurisdiction) 38 LL.M. 708 (1999)

[67] Agreement Between The Government Of The Republic Of Korea And The Government Of The People's Republic Of Bangladesh for the Promotion and Protection of Investments”, June 8, 1986, http://www.unctad.org/sections/dite/iia/docs/bits/korea_bangladesh.pdf

[68] Articles 5(3) of the Agreement Between The Government Of The Republic Of Korea And The Government Of The Islamic Republic Of Pakistan For The Promotion And Protection Of Investments; Agreement Between The Government Of The Republic Of Korea And The Government Of The People's Republic Of Bangladesh for the Promotion and Protection of Investments.” http://www.unctad.org/sections/dite/iia/docs/bits/korea_pakistan.pdf

[69] Ibid.

[70] “Responsibility of States for Internationally Wrongful Acts,” Yearbook of the International Law Commission, 2001, Vol. II (Part Two), United Nations General Assembly resolution 56/83 (2001), http://untreaty.un.org/ilc/texts/instruments/english/draft%20articles/9_6_2001.pdf

[71] Gabčíkovo-Nagyamaros Project (Hungary/Slovakia), ICJ Reports 1997, at 7.

[72] Chorzow Factory case: Case Concerning Certain German Interests in Polish Upper Silesia (1926) PCIJ Rep Ser A No 7

[73] International law cases are unlike common law cases in that they are not bound by the decisions of the court in a previous trial

[74] The Madagascan government may make a change in the law or in regulations order to protect its interests, such as the health of its environment, to the detriment of Daewoo’s profits or ability to continue operations

[75] Article 46(1) of the Vienna Convention on the Law of Treaties states that ‘a State may not invoke the fact that its consent to be bound by a treaty has been expressed in violation of a provision of its internal law regarding competence to conclude treaties as invalidating its consent unless that violation was manifest and concerned a rule of its internal law of fundamental importance.’

[76] Chile had signed BITs with Denmark and Croatia, which required the necessary permits to be issued once a foreign investment had been approved, the same treatment must be accorded to MTD Equity. “Current International Controversies,” Forum on Democracy and Trade, http://www.forumdemocracy.net/section.php?id=177

[77] Defined by the court in Compania del Desarollo v Costa Rica as “gradually and by small steps

reaches a condition in which it can be said that the owner has truly lost all the attributes of ownership” Compania del Desarollo de Santa Elena, SA v Republic of Costa Rica (Award) ICSID Rep 153, 172 (ICSID, 2000, Fortier P, Lauterpacht & Weil).

[78] Emma Aisbett, Larry Karp, and Carol McAusland, “Regulatory Takings and Environmental Regulation in NAFTA’s Chapter 11,” October 25, 2005, http://are.berkeley.edu/courses/EEP131/old_files/lectureNotes/CarolEmmafragment.pdf

[79] ‘Nothing in this Treaty shall be construed to present a party from adopting, maintaining or enforcing any measure otherwise consistent with the Treaty that it considers appropriate to ensure that investment activity in its territory is conducted in a manner sensitive to environmental concerns.’ Treaty between the United States of America and the Oriental Republic of Uruguay Concerning the Encouragement and Reciprocal Protection of Investment, Article 12(2), November 18, 2003, http://www.ustraderep.gov/assets/World_Regions/Americas/South_America/Uruguay_BIT/asset_upload_file582_6728.pdf

[80] Necessity can also be provided for explicitly within a BIT, as was done in Article XI of the USA-Argentina BIT,[80] though LG&E v Argentina held that a defence under a BIT and under customary law were distinct, and Enron v Argentina held that the treaty itself would have to provide guidance on what is meant by ‘essential security interests’, otherwise the tribunal would rely on the customary law.

[81] Article 25 of the Draft Articles on the Responsibility of States for Internationally Wrongful Acts (2001) gives guidance to international customary law on the issue. Necessity may not be invoked unless it is a) the only way for the state to safeguard an ‘essential interest’ against a ‘grave and imminent peril’, b) does not itself impair an essential interest of the state to which the obligation is owed, c) not explicitly excluded as an option and d) that the state has not contributed to the state of necessity.

[82] Michael Waibel, “Two Worlds of Necessity in ICSID Arbitration: CMS and LG&E”, Journal of International Law 20 (2007), 637-638.

My classmates include an Olympian, an ambassador & a future presidential candidate

Fri, 08 Apr 2011 04:02:55 GMT

Fletcher Reflections

"If they ever tell my story, let them say I walked with giants. Men rise and fall like the winter wheat, but these names will never die. Let them say I lived in the time of Hector, tamer of horses. Let them say I lived in the time of Achilles."

- Odysseus

Graduation ceremony approaches, and I've been reflecting on the past couple of years. I've had the privilege of forging friendships with inspiring classmates with as much to offer the world, if not more, than their predecessors (link to Fletcher alumni), as environmental custodians, development practitioners, academics, entrepreneurs, financiers, politicians, conflict resolvers, diplomats, responsible journalists, corporate managers and informed security analysts, and many things in between. The Fletcher School, Tufts University's Graduate School of International Affairs, overflows with fun, energy, ideas and charisma.

I have also had the privilege of forging friendships with classmates who have already come in with breath-taking achievements. That classmates come with stories of their experiences spanning the world, and involving colourful characters - such as a head of state at the International Criminal Tribunal - means that dinner conversations are seldom left wanting. But let's stop dabbling in the theoretical. Allow me to introduce you to a few of my classmates.

MIBs (Masters of International Business)

Courtesy: Kit Barron

I kid you not, Khushman Hans, F11, has:
- participated in and won 3 marathons, parachutes and deep-sea dives

- served as a naval engineer for India

- worked as an investment banker for Citibank, then in private wealth management and, for his internship between his first and second years at Fletcher, worked in real estate private equity in Mongolia
- degrees from the Indian Naval College of Engineering and a Master of Management from IIT Bombay

- a precocious 3 year old son who asks graduate students, "Do you lead by example?" and corrects adults with, "No it isn't, that's an anemometer"

Courtesy: Busola

Adebusola Laguda, F11, was the Chief Financial Officer of Zenon Petroleum and Gas Ltd, a leading marketing and distribution petroleum products company, with an ACA and an MBA from the University of Lagos under her belt. She also is the mother of an adorable 9 year old daughter.

Courtesy: Tufts

Nick Wachira, GMAP08 & F10, is the Managing Director of Kenya's The East African newspaper. He has won journalism awards from Barclays and Diageo. For his summer between his first and second years at Fletcher, he interned at the development consultancy Dalberg in Washington D.C. and at the boutique investment bank Lazard in Dubai.

MALDs (Masters of Arts in Law and Diplomacy)

Courtesy: The Boston Globe

A two times Olympic medalist, five times World Champion and nine times US champion, Michelle Kwan (link to LA Times article), F11, is the most decorated figure-skater in US history. She is also the author of three books, the founder of a scholarship programme for college-bound female athletes and a commencement speaker. In 2006, she was appointed the first US public diplomacy envoy. Besides all that, Michelle has been an understated but involved student at The Fletcher School for the past couple of years.

Courtesy: Ameesha

Ameesha Chandnani, F11, is one of several people at Fletcher who make me feel functionally provincial. Born in India, she's lived in six states of the USA, has a home in UAE, studied (ironically) a year of Economics in Argentina on exchange from Northwestern and has been taken to Nigeria on business engagements.

Between semesters at Fletcher, she has worked for the US government on South Asian affairs, for State Street in sovereign risk management and in public affairs for ExxonMobil. Prior to Fletcher, she managed infrastructure projects for Lemna International and before that was a business analyst for Target Corporation.

LLMs (Master of Laws)

Courtesy: Fletcher

Founder and Chairman of Loita Capital Partners, a pan-African investment bank, Justin Chinyanta, F10, came to Fletcher with over 20 years of professional experience in his field. In four years time, Justin intends to contest elections for the Zambian presidency.

Justin also serves as the Executive Vice President (Southern Africa) for the Africa Business Roundtable and is a member of the Initiative for Global Development's Frontier 100 CEOs. He sits on the boards of Junior Achievers International and Orphan Support Africa. He was a VP at Citibank and at HSBC Equator Bank in Africa, was a Fellow of Harvard's Weatherhead Center for International Affairs and has an Honorary Doctorate to his name.

PhDs

Courtesy: Patrick Meier

Where in the world is Patrick Meie r? (Link to NY Times article.) Swiss, Patrick was born in Cote d'Ivoire, raised in Kenya and has since been consulting in the USA, Norway, Switzerland, Kenya, Kyrgyzstan, Sudan, East Timor, Northern Ireland, Austria, Ethiopia, Gambia, Somalia, Congo-Brazzaville, Belgium, and probably a few more countries I failed to mention for organisations that include various UN agencies, ECOWAS, Africa Union, USAID, DAI and the OECD.

Less varied are Patrick's educational institutions, which include York University in England, a year exchange at Berkeley, his masters at SIPA, Columbia, his PhD at Fletcher and a fellowship at Stanford.

As the Director of Crisis Mapping and Strategic Partnerships at Ushahidi, Patrick has introduced this non-profit's open-source platform to the community at Fletcher, where students have engaged in helping victims of natural disasters in Haiti, Chile, Pakistan and Japan. In the case of Haiti, Fletcher students guided US Coast Guards to areas of need, and in the case of Japan, the students, mainly representatives of the Japanese government, passed on the initiative to the government of Japan.

GMAPs (Global Masters of Arts Program)

Courtesy: IPI

Ambassador Adonia Ayebare, GMAP12, (links to AllAfrica article) is the Ugandan Ambassador to the UN. In a previous life, he was a journalist, but in the past decade has been playing key roles in mediating peace between Uganda and neighbouring Rwanda and Burundi. Most recently, he has served as Director of the Africa Program at the International Peace Institute.

Adonia has three prior masters degrees.

Similar observations of mine echoed in yesterday's The Independent

Inspiring friends: Onur Tekinturhan, founder of Turkey's first independent online mortgage brokerage

Mon, 04 Apr 2011 04:59:41 GMT

With Onur and Bade on the Bosphorus

Onur Tekinturhan has launched what he claims to be Turkey's first independent online mortgage brokerage company, Konut Kredisi Com Tr Danismanlik A.S.

Konut Kredisi, literally "housing loan", provides mortgage comparison services online and via expert consultants. The current predominant model in Turkey is one where online forms gather leads and pass them onto several banks, harming the credit ratings of prospective customers. Because it runs on a process not driven by the banks themselves, KonutKredisi.com.tr makes the market more consumer-friendly by using standard formats for the presentation of loan offerings, so that comparisons are easy, it does not pass on prospective client information to banks which would hurt their credit rating, and it exposes hidden fees, future penalty commitments and non-mandatory insurance requirements. The democratic nature of KonutKredisi.com.tr means that soon it will provide an alternative channel to smaller lenders with low branch penetration. In short, KonutKredisi.com.tr is going to lower the transaction costs of finding mortgages in Turkey.

Onur's company is Turkey's first such online mortgage brokerage company with a corporate structure, sufficient capital, know-how (thanks to its Italian investors, who are the main shareholders and executives of the publicly traded Italian mortgage broker Gruppo MutuiOnline), a professional team, real bank agreements and a service offering that is not driven by the banks themselves.

The US sub-prime crisis is partially to be blamed on the delegation of credit risk assessment by banks to mortgage brokers. Because Onur's company won't do credit checks of borrowers on behalf of loaning banks, the moral hazard that brought down the US economy will not exist here.

The days of Turkey's hyper-inflation (and high interest rates) are behind the country. Yet Turkey is lagging Europe far behind in terms of consumer borrowing for house purchases - in Europe mortgage outstandings range between 20-60%, whereas they barely reach 5% in Turkey. By making borrowing a more transparent process, Onur is financially empowering his people.

30th January, 2010

Regulating Frontier Market Funds as Value Creating Enterprises

Sun, 27 Mar 2011 23:50:30 GMT

Imaduddin Ahmed

The Fletcher School, Tufts University Graduate School of International Affairs

I. Introduction

Do the current U.S. laws regulating the fund-raising activities of private equity funds raising capital for portfolio companies adequately balance the interests of sophisticated investors seeking higher returns, foreign private equity funds and firms in least developing countries requiring growth capital with the interests of lay investors? This is the question that I will attempt to answer in the forthcoming paper.

It is a question that came to the fore when sent a response by a colleague on a networkers' email listserv. I, a graduate student, had invited colleagues via email to attend a speaker event that I was organising on my campus; the principal of TLG Capital was to present how his private equity fund delivered both high social as well as financial value in frontier markets. My email, however, was interpreted by my colleague as a fund-raising solicitation.

To tackle the question, I will begin by laying out the interests at stake, which of those the U.S. government concerns itself with and which of those interests clash with one another. I will then examine how the U.S. government has attempted to balance those interests in terms of the regulations in place. I will examine registration requirements, exemptions and modifications made by the Dodd-Frank Act subsequent to the 2008 financial crisis. Having lain out the policy objectives and described the policy in place, I will then assess whether the government’s laws meet its objectives, and, if not, make recommendations for how it could better achieve those objectives.

II. Key interests at stake

When it comes to regulating to ensure consumer protection, the government usually has to balance the interests of the lay consumer with those of the U.S. economy, at least theoretically. (The interests of corporations without regard to the benefits bestowed overall on the U.S. economy also get weighed.*[1]) So it is with the protection of lay investors from fraud, inadequate disclosure and manipulation of stock prices[2]: the government has to consider the potentially clashing interests of the U.S. economy in both the short-term, and the long-term, as well as the freedom of informed U.S. investors to make their own choices. Arguably, the U.S. government should also take into account the impact that its regulations could have on the development of lesser developed countries, without regard to its own enlightened self-interest.

Certainly, when it comes to the welfare of people of lesser developed nations, the U.S. has sacrificed short-term benefits to its own economy, and the benefits of doing so are not always couched in terms of self-interest, as is demonstrated by President George W Bush’s State of the Union address on January 29^th, 2003 relating to the introduction of the President's Emergency Plan for Aids Relief (Pepfar), which was to save more than a million people with HIV in Africa[3] at the expense of $15 billion to the U.S. economy:

“As our nation moves troops and builds alliances to make our world safer, we must also remember our calling, as a blessed country, is to make the world better [ . . . ] I ask the Congress to commit $15 billion over the next five years, to turn the tide against AIDS in the most afflicted nations of Africa and the Caribbean."[4]

Besides humanitarian considerations, the U.S. government has its long-term interests to think of. A weak sub-Saharan Africa (SSA) represents cause for concern in terms of security, as well as lost opportunities for American businesses. The post-World War II rebuilding of Japan and Europe with the Marshall Plan has gained U.S. corporations access to deep markets and gained the U.S. economy invaluable trading partnerships that continue today. Facilitating, therefore, investment into SSA that will help improve the growth and liquidity of companies in the region, which will in turn address consumer demand for solutions to healthcare problems, as well as unemployment, is a desirable policy goal for the U.S. government. Indeed, it is congruent with the objectives of the Generalised System of Preference and the Africa Growth and Opportunity Act that the U.S. has acted upon.

More direct long-term interests to be thought of are maintaining the U.S.A.’s status as home of the world’s leading capital markets, which requires openness to foreign issuers. Too, hindering sophisticated investors from taking a different set of risks restricts not only their individual freedom – anathema to the spirit of America*[5] – but hinders them from not diversifying the risk of their portfolios, and hinders them from achieving superior returns that could be circulated within the U.S. economy.

At the same time, the U.S. government has a duty to protect its citizens from becoming victims of crime, such as fraud, and will want to ensure that its markets run efficiently, with low transaction costs. To use the language of the International Organization of Securities Commissioners (IOSCO), the U.S. government will want to protect investors from ‘misleading, manipulative or fraudulent practices’ and ensure that markets are ‘fair, efficient and transparent’.[6]

III. Protecting investors and capital formation

To this end, Congress passed the Securities Act of 1933 and the Investment Company Act of 1940; access to the U.S.A.’s public financial markets would be conditioned upon disclosure. Further, Congress passed the Securities Exchange Act of 1934, creating an agency whose raison d’etre would be to protect investors, as well as capital formation.[7] Such a siloing of purpose means, as will be seen, that not all matters of interest to the U.S. government are given due consideration.

Of issuers, the International Organisation of Securities Commissions recommends the ‘full, accurate and timely disclosure of financial results and other information which is material to investors’ decisions’.[8] This philosophy the S.E.C. abides by for securities that are publicly traded. The types of disclosures the S.E.C. requires include forms S-1, S-3, F-1 (for foreign issuers, Form 20-F, Form 6-K), descriptions of the business and its properties, descriptions of risks, legal proceedings or environmental problems that the firm faces, a description of the compensation of the top management, a description of the securities and the capital structure, a disclosure of shareholders with greater than 5% ownership in the company, a description of the plan of distribution and arrangements made with underwriters, a description of the plan of the use of proceeds, a management discussion of the firm’s financial situation and any changes in the financial condition since the previous year, disclosure of any other material information, audited balance sheets for 2 years, audited income statements for 3 years, an audit report and cash flows.[9] The firm’s auditors are required to be independent and the firm’s accounts must reconcile with USGAAP, unless the issuer is foreign, in which case IFRS is now acceptable.*[10]

Liability for faulty misstatements or omissions of material facts in the prospectus is strict, and according to Section 11, there is no defense for this. Underwriters and directors also have strict liability, but have recourse to a due diligence defense.[11]

For securities that are intended for investors more sophisticated than the general public, however, the S.E.C. does away with the registration and disclosure requirements. These securities ‘lack the same degree of transparency required of publicly offered issuers, on the theory that these investors can "fend for themselves,"’ explains Andrew Donohue, Director of the S.E.C. Division of Investment Management.[12]

Driven by the reluctance of foreign issuers to enter the U.S. market with such stringent registration requirements, the S.E.C. adopted Rule 144A in 1990.[13] Within a year, foreign firms were responsible for one-third of the $16.7B in issuance of Rule 144A stock [ . . . ], as compared with 16% and 7% of offerings made in private and pubic bond markets respectively.[14] In 2007, nearly 80% of capital raised by foreign firms in the U.S. was done through the 144A market. [15]

Rule 144A applies to issuers of private offerings to Qualified Institutional Buyers (QIBs), exempt from registration under section 4(2) of the Securities Act of 1933. The securities must not be fungible with securities trading in public markets and a two year holding period is generally required. Alternatively, the offering can be made under Rule 144, where there is a six-month holding period for reporting companies and one year for non-reporting companies.[16]

Qualified Institutional Buyers must own and invest a minimum of $100 million in securities or must be owned by firms or individuals all of whom qualify as QIBs. If the firm is a bank or a thrift, it must have a net worth of $25 million. A QIB can only make purchases for itself or for another QIB.

The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 further decreases the participation of QIBs in private equity funds, to 3% of Tier 1 Capital through the second Volcker Rule.[17]

Disclosure under Rule 144A is minimal – only required at the purchaser’s request, and, according to Hal Scott, ‘some minimal financial information’, which can be waived if the foreign issuer files home country reports under Rule 12g3-2(b). Failure to disclose or misstatements are only subject to private actions under Rule 10b-5 liability.

Under this exemption, unsolicited transactions – including, according to Rule 15a-6(a)(1), placing telephone calls, advertising through broadcast media or publications in general circulation in the U.S. or conducting seminars for U.S. investors – are prohibited.

In May 2006, the highly leveraged buyout private equity fund Kohlberg Kravis Roberts (KKR) sold its offering to U.S. institutional investors through the Rule 144A market. Writes Scott[18], ‘it appears they did not list in the U.S. due to concerns as to whether the offering would be regarded as an investment company under the 1940 Investment Company Act, with the effect that significant restrictions, eg as to leverage and fees, would be imposed on their operations, and result in the need for greater disclosure about the fortunes of the private companies in which they invest.’

Another avenue that private equity funds can take in order to raise funds without registering is through individuals, by using the private fund exemption under Section 3(c)(1) or Section 3(c)(7) of the Investment Company Act of 1940, together with the section 4(2) exemption of the Securities Act of 1933.[19] The former limits the number of investors to 100, while the latter permits only “qualified investors”[20] who also meet the “accredited investor” test of Regulation D[21] – individuals or family partnerships with at least $5 million in investable assets and companies with at least $25 million. – to invest.[22] For exemption, Rule 506 of Regulation D prohibits the offering or selling its securities using “general solicitation or general advertising.”[23] Such solicitation is defined in Rule 502(c) and include print advertising, media broadcasts, an invitation to a seminar or meeting by such methods as constituting general solicitation or advertising.[24] Emails soliciting capital must be targeted at only accredited or otherwise sophisticated investors.[25]

Rule 506 does allow for the sale to up to 35 non-accredited investors who are financially sophisticated, ie possess “such knowledge and experience in financial and business matters that he is capable of evaluating the merits and risks of the prospective investment.”[26] To remain exempt, funds must take steps to prevent their securities from being resold by the purchaser without registration or qualification for another exemption, by, for example, inquiring as to whether the purchaser is an underwriter with the intent to resell and making clear in writing to investors of their inability to resell without registering under the Securities Act.[27]

Either way, private equity managers meet the definition of “investment adviser” under the Advisers Act of 1940, since they ‘engage in the business of advising others’ for compensation as to the advisability of investing in securities, and do not fall into one of the exempted professions.

However, section 203(b) of the Investment Advisers Act of 1940, as amended by section 403 of the Private Fund Investment Advisers Registration Act of 2010, exempts from registration ‘any investment adviser that is a foreign private adviser’, which is convenient for a London-based growth equity fund. Before the amendment, a manager at TLG Capital may have found exemption in the clause that this new clause supplants, had the manager not had more than 15 clients.

Funds engaging in private placements pursuant to section 4(2) and Regulation D are subject to liability under the Securities Act, the Securities Exchange Act and the Advisers Act, and can be sued by the S.E.C. not only for fraudulent and misleading statements and omissions, but for negligence.[28]

We will not concern ourselves with Regulation S since ownership in funds is seldom traded and we are concerned with the direct selling of securities in the U.S.A.

IV. Critique

Fund-raising through Rule 144A and through Regulation D exemptions will face different advantages and disadvantages. Both methods stymie solicitation, though emails by students advertising funds visiting their universities would not likely have contravened these limitations because a) they are not solicitations for capital raising[29] and b) students are not compensated for sending out emails advertising events they themselves organise.[30]

A specified required holding period of up to two years, as stipulated for funds raising through Rule 144A, should not harm growth equity funds, which often require lock-in periods of 5+2 years.[31] Many funds will, in any case, count IRR from the time of divestment, as opposed to the time that the investor receives his money back.[32]

The S.E.C. will sue for misstatement, fraud and omissions, intended or otherwise, for funds raising capital through Regulation D, and understandably so, given that the targets are individuals rather than Qualified Institutional Buyers institution, which possess, in the words of Scott, ‘the most sophisticated knowledge of the securities market’.[33] Without the resources of an institution to carry out the requisite due diligence, individuals rely on the information provided to them. The disadvantage with raising capital only through Rule 144A, however, is that smaller frontier market funds (such as TLG Capital, which in 2009 only had $25 million under management[34]) will be less likely to target individuals, who may be more appropriate investors at the earlier stages of fund growth.

That Volcker’s rules reduce the participation of QIBs in growth equity funds, despite the fact that they are not highly levered and their investments in commercial companies do not pose the systemic risk that Volcker’s rules try to protect the economy from (unless they were financial institutions, in which case they would be regulated for that part of their business like other financial services holding companies[35]), makes little sense. It also makes little sense that the number of QIBs should be limited to 500 without triggering regulation under the Securities Exchange Act of 1934 and Sarbanes Oxley.

The restriction on investors by number or by wealth through Regulation D is, however, a nonsense. In the case of hedge funds, the S.E.C. worries that qualified investors “may find it difficult to appreciate [ . . . ] complicated investment strategies.”[36] While this can be said of hedge funds, it cannot be said of growth equity funds, whose most complex transactions are call options. And if this were so, why allow up to 100 investors (where there is a lower investment test presumably because of the limit on investors[37]), or up to an arbitrary 35 non-accredited ‘financially sophisticated’ investors, in the case of section 3(c)(7) Act of 1940, get fleeced? Another fault with the limit on beneficial ownership is that, according to Scott[38], many foreign investment companies will either refuse to offer their shares in the U.S. or make it very difficult for U.S. investors to buy shares in their funds, out of fear that one additional shareholder beyond 100 would cause them to no longer be exempt from the 1940 Act.

Moreover, the limit on investors, or on financially sophisticated investors who do not possess $5 million in investments, but do possess business sense and financial literacy, denies thousands of bankers, strategy consultants, chartered accountants, corporate lawyers, financial journalists, finance and business law academics, credit rating analysts and students of finance potentially superior financial returns. It denies sophisticated investors the opportunity to decide for themselves what their risk-reward trade-off should be. In the case of funds which also achieve social returns, the limit also denies the many sophisticated investors from supporting initiatives that help develop under-financed economies in a dignified and accountable way and would, perhaps, suit their ideologies better than do most charities. Charities, which often do not support people in a dignified and accountable way, do not require have sophisticated investor[39] requirements.[40] Why then limit the number of sophisticated investors who can hold accountable the funds purporting to do this?

These are questions that perhaps the S.E.C may forget it can answer. Though it is an agency with siloed responsibilities, it has a duty to maintain fair markets[41] and facilitate capital formation[42]. It is hardly fair to prevent those with less than $5 million in investments from becoming rich, and it does not facilitate capital formation to stand in the way of funds accumulating capital in order to create company growth and profit growth, which would be repatriated to U.S. investors. Going forward, the S.E.C. should remove arbitrary restrictions on the limit on sophisticated investors who can invest in private equity funds, particularly growth equity funds, and review the Volcker Rules as pertaining to unlevered private equity funds.

[1] *Consider the effects of the agricultural lobby.

[2] C. Edward Fletcher, III, “Sophisticated Investors Under the Federal Securities Laws,” Duke Law Journal 6 (1988): 1081, 1133.

[3] Chris McGreal, “George Bush: A Good Man in Africa,” The Guardian, February 15, 2009, accessed March 13, 2011, http://www.guardian.co.uk/world/2008/feb/15/georgebush.usa.

[4] “Bush’s State of the Union Speech,” CNN, January 29, 2003, accessed March 13, 2011, http://edition.cnn.com/2003/ALLPOLITICS/01/28/sotu.transcript/

[5] *Please note the precedence given to the term ‘secure the Blessings of Liberty’ in the preamble of the U.S. constitution

[6] “Objectives and Principles of Securities Regulation,” International Organization of Securities Commissioners (IOSCO), (1998): 6-7.

[7] “The Investor's Advocate: How the SEC Protects Investors, Maintains Market Integrity, and Facilitates Capital Formation,” U.S. Securities and Exchange Commission, accessed March 14, 2011, http://www.sec.gov/about/whatwedo.shtml

[8] International Organization of Securities Commissioners (IOSCO), Objectives and Principles of Securities Regulation (1998)

[9] Joel Trachtman, “Securities Regulation,” Fletcher School of Law and Diplomacy In-Class Presentation, January 31, 2011, 19-22.; Hal S. Scott, International Finance: Transactions, Policy and Regulation (Foundation Press 17th ed. 2010), 58-61.

[10] *USGAAP requirements ended for foreign issuers using IFRS as of 2009.; Scott, International Finance: Transactions, Policy and Regulation, 174.

[11] Trachtman, “Securities Regulation,” 22-23.

[12] Andrew J. Donohue, “Regulating Hedge Funds and Other Private Investment,” (Speech presented at the Fordham Journal of Corporate and Financial Law's 3rd Annual Symposium on the Regulation of Investm,ent Funds, New York, New York, February 19, 2010), http://www.sec.gov/news/speech/2010/spch021910ajd.htm

[13] Scott, International Finance: Transactions, Policy, and Regulation, 187.

[14] Scott, International Finance: Transactions, Policy and Regulation, 189.

[15] Scott, International Finance: Transactions, Policy and Regulation, 189.

[16] SEC Release No 33-8869, December 6, 2007

[17] Viral V. Acharya et al., Regulating Wall Street: The Dodd-Frank Act and the New Architecture of Global Finance, (New York: New York University Stern School of Business, 2011), 47.

[18] Acharya et al., Regulating Wall Street: The Dodd-Frank Act and the New Architecture of Global Finance, 111.

[19] Shadab, “Fending for Themselves: Regulatory Reform to Create a U.S. Hedge Fund Market for Retail Investors,” New York University Journal of Legislation and Public Policy 11 (Spring 2008): 285, accessed March 15, 2011

[20] For further details, refer to http://www.clivecapital.com/download/definitions.pdf

[21] Scott, International Finance: Transactions, Policy and Regulation, 947.

[22] Donohue, “Regulating Hedge Funds and Other Private Investment.”

[23] Regulation D, Rule 506, 17 C.F.R. §§ 230.502(c) & 506(b)(1) (2007)

[24] Regulation D, 17 C.F.R. § 230.502(c)(1) (2007)

[25] See In re CGI Capital, Inc., Securities Act Release No. 7904 (Sept. 29, 2000)

[26] Regulation D, Rule 506(b)(2)(i)–(ii), 17 C.F.R. § 230.506(b)(2)(i)–(ii) (2007)

[27] Shadab, “Fending for Themselves: Regulatory Reform to Create a U.S. Hedge Fund Market for Retail Investors,” New York University Journal of Legislation and Public Policy 11 (Spring 2008): 288, accessed March 15, 2011

[28] Shadab, “Fending for Themselves: Regulatory Reform to Create a U.S. Hedge Fund Market for Retail Investors,” New York University Journal of Legislation and Public Policy, 300-301.

[29] See In re CGI Capital, Inc., Securities Act Release No. 7904 (Sept. 29, 2000).

[30] § 80b-3(b)(3)

[31] Oliver Gottschalg, "Managing a Buyout and its Exit", HEC School of Management Paris In-Class Presentation, December 1, 2010.

[32] Ibid.

[33] Scott, International Finance: Transactions, Policy, and Regulation, 188.

[34] Carolyn Cohn, "Signs of life seen in Africa private equity", Forbes, October 6, 2009, Accessed March 13, 2011, http://www.forbes.com/feeds/afx/2009/10/06/afx6969406.html

[35] Scott, International Finance: Transactions, Policy, and Regulation, 113.

[36] Shadab, “Fending for Themselves: Regulatory Reform to Create a U.S. Hedge Fund Market for Retail Investors,” New York University Journal of Legislation and Public Policy 11 (Spring 2008): 293, accessed March 15, 2011

[37] Scott, International Finance: Transactions, Policy, and Regulation, 947.

[38] Ibid., 945.

[39] *In the sense that they require social returns

[40] Conversation with Trachtman, 14^th March

[41] “The Investor's Advocate: How the SEC Protects Investors, Maintains Market Integrity, and Facilitates Capital Formation.”

[42] “The Investor's Advocate: How the SEC Protects Investors, Maintains Market Integrity, and Facilitates Capital Formation.”

Is your economy sharia compliant? (The Guardian comment piece)

Fri, 25 Mar 2011 09:01:59 GMT

Our system of sovereign sukuk ratings could benefit the global economy and promote better cross-cultural relations

Imaduddin Ahmed

guardian.co.uk, Wednesday 2 February 2011 15.02 GMT

Also, linked to by the Wall Street Journal: http://onespot.wsj.com/politics/2011/02/02/489aa/is-your-economy-sharia-compliant

Think of two of the most common problems highlighted in today's news: the state of the global economy and violence at the hands of Islamists. Here's a possible remedy to both: a sovereign sukuk rating system.

Such a rating would show which economies are sharia-compliant and hence suitable candidates for asset-backed Islamic bonds in the form of sovereign sukuks. The metrics used in such a rating would mean that countries would be judged on their default risk, as well as on how ethical (and hence how Islamic) their economies are.

My colleagues Paul Hailey, Justin Lau and I at the HEC School of Management, Paris, constructed an initial rating, assessing countries on their deficit to GDP ratio, their score on the Global Peace Index, their defence spending to GDP ratio, their score on religious freedom using the Pew Forum's Government Restrictions Index as a proxy, their score on the Social Hostilities Index and their score on the Corruption Perceptions Index. We then excluded economies whose income from alcohol, interest-bearing finance, pornography and gambling crossed particular thresholds and excluded countries with populations less than 100,000, since there would be few physical assets to finance. We also excluded economies for which we did not find sufficient information. Using these metrics, we found 35 economies to be sharia compliant. Ironically, not one was an Islamic state. The top 10 economies were Norway, New Zealand, Sweden, Finland, Uruguay, Estonia, Costa Rica, the Netherlands, Slovenia and Austria.

Were an international body of Islamist jurists, say the Islamic Financial Services Board, to come up with a similar rating with similar findings, there could be several outcomes.

First, the fact that Muslim nations fare poorly would, hopefully, give Muslim populations pause for thought. Pakistan, currently a democracy, is debating whether to repeal its blasphemy laws, which could result in the execution of a Christian woman for allegedly insulting the prophet Muhammad. The governor of Punjab, Salmaan Taseer, spoke up against the laws and was consequently assassinated by his own bodyguard. Will keeping laws in place open to abuse by a public and officials whose nation ranks low on Transparency International's Corruption Perception Index help Pakistan surpass Norway in terms of Islamic perfection? Unlikely. Further, Pakistan's blasphemy laws prohibit Ahmadis from calling themselves Muslims or from proselytising. Allowing for religious freedom is advocated by the Qur'an, as in verse 10:99, and so, arguably, hurt Pakistan's sharia compliance, in addition to its score on the Pew Forum's Government Restrictions Index. Publicly explaining why Muslim countries fall short of Muslim standards by a respected body of Islamic jurists should reduce misguided religiously motivated crimes.

Second, the ratings could give a number of Muslims prone to violence a sense of empowerment and hence diffuse their need for violence in order to be heard. If nations strive to improve their sharia compliance, Islamic values will have impacted the global economy.

Third, sharia-compliant economies, such as Uruguay and Costa Rica, which are not highly rated by traditional rating agencies, will find increased demand influenced by the sovereign sukuk ratings. Their Islamic debt, influenced by this new rating, will hopefully be cheaper than traditional debt.

Fourth (without taking into consideration the underlying asset), investment in sharia-compliant economies could help investors looking to diversify their portfolios. When comparing the return on assets of the three most sharia-compliant economies, for example, we found that they were strongly uncorrelated with, weakly uncorrelated with and weakly correlated with the Dow Jones Industrial Average over the past five years.

There are, of course, weaknesses with the concept. The sharia-compliant economies of the world are mostly highly rated by traditional sovereign rating agencies, so there would be little value-add for them in terms of increased demand for their debt. Over-levered economies that would benefit from asset-backed Islamic bonds would not be found to be sharia compliant. Nations would be required to change their legislation to allow their debt issuers to seize the public assets financed in the case of default. This would be politically difficult to sell to voting populations. The secondary market for sovereign sukuks may be difficult to establish, given that there would be asymmetric information as to the quality of the underlying asset. To some Muslims, "sharia" is a manmade contrivance, and an effort to create sharia-compliance rankings even more so. Finally, many nations would not want to entertain the notion of being held accountable to Islamic values.

But if a recognised body of jurists were able to come up with a such a rating, there certainly would be value-add for the global economy. Such a rating would be a source of shame for failing Islamic states and would give them standards to aspire to, as communities and nations. For non-Islamic states performing well on the rankings as well as on traditional ratings, the value-add would be an increased awareness of the shared values that Islam has with their culture. Mixing business with religion and politics could, with sovereign sukuk ratings therefore, be a source for better understanding between populations and for peace.

Pakistan, rebranded (Boston Globe op ed)

Fri, 25 Mar 2011 02:07:55 GMT

An article about rebranding Pakistan to investors

Pop-star Ali Zafar

Lifetime human rights lawyer Asma Jahangir

Renowned social worker Abdul Sattar Edhi

http://www.boston.com/bostonglobe/editorial_opinion/oped/articles/2010/03/25/pakistan_rebranded/

Pakistan, rebranded

By Imaduddin Ahmed and Kapil Komireddi March 25, 2010

GOOGLE “PAKISTAN is’’ and you’ll find a host of common searches: “a failed state,’’ “a terrorist country,’’ “doomed’’ and — encompassing all of the above — “the problem.’’ Pakistan’s image is both the effect and a potential cause of terrorism: it scares away business investments, and leaves jobless youth without opportunities, ripe for mullahs who promise riches in the afterlife. In significant ways, however, the actual security risks faced by private enterprises in Pakistan is no greater than the violent threat they face in India.

It is a testament to India’s public relations success that extraordinary threats, both internal and external, have done little to diminish India’s standing as a favored destination for foreign capital. In 2008, Islamist terrorists killed at least 170 civilians in India’s financial capital, Mumbai, exposing the government’s inadequacy at protecting its citizens.

This was not a one-off occurrence. The same year, Hindu extremists had claimed at least 100 Christian lives in the state of Orissa. In 2002, Hindu extremists slaughtered up to 2,000 Muslims in Gujarat; Human Rights Watch found that the attacks were organized with extensive police participation and in close cooperation with officials of the Bharatiya Janata Party, the ruling state party.

Meanwhile, minutes away from Hyderabad, India’s answer to Silicon Valley, a Maoist insurgency has taken grip that spreads across nine Indian states and has already cost at least 6,000 lives, according to the BBC. Secessionist movements in the north, west, and eastern parts of India are challenging the Indian state’s endurance, and are often met with extra-constitutional brutality by the state.

Despite India’s travails, it is known by the amicable faces of actors Amitabh Bachchan and Shahrukh Khan, Prime Minister Manmohan Singh, sitarist Ravi Shankar and a string of Ms. Universes. Were it not for their global outreach and the consequent foreign investment it secured, the Indian narrative today would be very different.

So how can Pakistan emulate India’s success?

First, Pakistan must address the major difference between the two countries: their Standard and Poor currency convertibility ratings. India is rated BBB+, Pakistan has a B-, the same as Ukraine and Argentina. Institutions seeking investments would do well, therefore, to direct investors to reputable insurers that insure against currency inconvertibility, as well as against political violence and terrorism.

Pakistan would also do well to emphasize that it has fewer regulatory restrictions on foreign investment than neighboring India and that it ranks 58 places higher than India in the World Bank’s “Doing Business’’ 2010 report; that, like India, it has a substantial middle-class population fluent in English; and that until Lehman Brothers and the food and oil price shocks of 2008, its stock exchange was growing at a rapid rate.

Finally, Pakistan and its allies must help Pakistan exert soft-power, as its larger, similarly troubled neighbor successfully has, in order to negate associations with terrorism and failure.

Lifetime human rights lawyer Asma Jahangir, Supreme Court Chief Justice Iftikhar Chaudhry, who stood-up for an independent judiciary, and Aitzaz Ahsan, his lead counsel, are citizen heroes no less worthy of international status than Aung San Suu Kyim, the pro-democracy opposition leader under house arrest in Myanmar. Mukhtaran Mai, a village girl punished to gang-rape and who responded by founding schools in her community, and philanthropist Abdul Sattar Edhi, who set up the largest private ambulance service network in the world and holds the record for the longest time worked without having taken a holiday, are no less noteworthy than Mother Teresa.

The White House is linking Muslim entrepreneurs from around the world with US businesses with which they may have synergy. The US State Department ought to do the same for Pakistani artists. Contemporary English-language fiction writers such as Mohammad Hanif entertainingly narrate stories of Pakistan. The late Sufi tenor Nusrat Fateh Ali Khan and pop artists Atif Aslam and Ali Zafar have a following throughout South Asia, but are virtually unheard of beyond.

With a little help from its friends, Pakistan can emulate India by imprinting the face of Ali Zafar over AQ Khan in the minds of foreign investors. Enticing more investment and hence job opportunities, Pakistan and friends will have done their part to lure urchins with constructive, rather than destructive, aspirations.

Imaduddin Ahmed is a global business scholar at The Fletcher School of Law and Diplomacy. Kapil Komireddi is an Indian writer.

Working Paper for Pakistan International PR Agency (PIPA) - Branding Pakistan (paper for Professor Simonin's class). Let me know if you would be interested in joining PIPA
Which faces do you know Pakistan by?
Pakistani youth today: not without a voice in the Western media
A more creative solution to terrorism

25 March, 2010

What if the world had been following Islamic financial practices? (The Guardian comment piece)

Thu, 24 Mar 2011 13:39:06 GMT

The Guardian:
http://www.guardian.co.uk/commentisfree/belief/2011/jan/07/islam-fairer-finance-moral-risk

Bloomberg BusinessWeek:
http://bx.businessweek.com/credit-default-swaps/what-if-the-world-had-been-following-islamic-financial-practices--imaduddin-ahmed/9014944595921193510-ff9e0b5b31c32c3003bf34c8fc03f50b/

Imaduddin Ahmed

guardian.co.uk, Friday 7 January 2011 12.22 GMT

Sub-prime loans, which caused housing foreclosures in the US, are not allowed in Islamic finance. Photograph: Alex Wong/Getty Images

Imagine a world without a financial crisis. No moral hazard, so brokers won't sell mortgages without carrying out appropriate credit checks. Imagine banks not deliberately selling complex derivatives, knowing that they will be worthless. No short-selling speculation, so companies tinkering on the edge won't be pushed over. Imagine a world with Islamic finance.

"The practices that caused the financial crisis would not have passed muster with sharia boards – committees of religiously inspired legal scholars who conduct a religious audit of a bank's activities. Neither the securitisation of sub-prime loans nor credit-default swaps are acceptable in Islamic finance," says Ibrahim Warde, author of Islamic Finance in the Global Economy and a professor at Tufts University.

"Similarly, negative Islamic attitudes towards short-selling were vindicated by the role short-selling played in many aspects of the crisis and subsequent limits placed on short-selling in London and New York. Some old-fashioned principles such as the distrust of excessive leverage and of open-ended innovation proved well founded. As for the systematic vetting of new products by sharia advisers, it could be looked at as a system of checks and balances, a useful corrective to the groupthink that had overtaken conventional finance."

Islamic finance extends beyond its well-known characteristics: interest-free banking and the prohibition of investment in items or activities deemed un-Islamic, such as prostitution, gambling, pornography, pig farming and alcohol. In contrast to conventional loans, Islamic bank loans are confined to financing the purchase of physical assets, to which they have recourse in case of default.

Creditors and debtors alike must share business risk, Islamic finance prohibits speculation (such as was practised by AIG with credit default swaps) and similarly prohibits trades that are considered to have excessive risk due to uncertainty, such as naked short-selling, where there is uncertainty involved in the future delivery of the underlying asset. Arguably, Islamic finance also prohibits speculation that property prices will forever continue to rise, as well as bailouts, since they are only loss and not profit sharing for governments. (The UAE may disagree.)

Islamic banks largely mimic conventional commercial banks through profit- and loss-sharing contracts. The bank will buy goods on behalf of the borrower and then sell it on a deferred basis at a markup. The profit-sharing principle prevents Islamic banks from outsourcing debt origination to brokers who would have no incentive to perform thorough due diligence on prospective debtors.

Additionally, according to Warde, Islamic mortgages are attractive to customers because they are vetted by sharia advisers, and predatory practices, which are common practice with traditional mortgages, are forbidden. If customers are unable to keep up with their payments, banks are encouraged to show forbearance and are allowed to count such losses as part of their mandatory annual zakat payment, the Islamic equivalent of a charitable tax.

"This has a cost, but if you weigh the social benefit, it's a worthwhile cost. The obligation can be handled in a prudential way. At the time of the Asian crisis, the Malaysian banks reasoned that they would have collapsed had they shown forbearance to all of their debtors. The socially desirable thing should not come at the expense of a bank's ability to survive as a business," says Warde.

Islamic finance has its limitations. It does not wave a magic wand to do away with inherent business risk, nor does it have a way of dictating that investors avoid correlated and fat-tail risks that lead to bubbles prone to bursting.

Auditing, too, remains a problem. Though standards are set by external bodies – the Islamic Financial Services Board and the Accounting and Auditing Organisation for Islamic Financial Institutions – it is the bank-employed sharia advisers who decide whether a financial institution is compliant with those standards or not. This maintains the inherent conflict of interest present in the relationship between traditional financial institutions and their auditors, such has been seen with KPMG and New Century Finance, a US sub-prime lender.

With Islam being the diverse religion that it is, there is some scope for hiring scholars who will interpret the standards liberally. Western banks, with their more liberal advisers, are increasingly responsible for innovations in Islamic finance. But there are no checks to stop banks from paying for fatwas. Islamic finance has, like its non-Islamic counterpart, yet to devise a system whereby auditors are paid for by an external body.

Would Islamic finance have allowed the world to realise the technologies that it has? Perhaps not. One spinal-repair researcher at University College London, Jacqueline Kueh, recalls how more research was funded during the boom times. Secondly, the elimination of interest that most sharia boards require would have created a highly inefficient debt market. Here, businesses would be at the mercy of Islamic bankers for the purchase of every asset they required as the banks contrived to stick to the form of their interpretation of Islamic requirements. Greater inefficiency in financing means slower growth.

Islamic finance is not necessarily an end in itself, but it does serve to remind of the need for humane banking, the elimination of moral hazard and the reassessment of assumptions that speculators and derivatives add more value than they destroy.

7th January, 2011

The business case for Anglophone sub-Saharan Africa

Fri, 18 Mar 2011 16:07:13 GMT

http://www.youtube.com/v/XkXAqVmfdho?fs=1&hl=en_GB

Because of the gulf that exists between the reality on the ground and the perception abroad, enterprising African companies which would drive the continent’s growth aren’t getting the financing they need.

According to the World Bank, 86% of Indians live below the poverty-line, compared to 80% of sub-Saharan Africa.

Yet there is optimism about India's economic prospects

And it is misperceptions about Africa that so often leads society to think, “How more can we help?”, whereas, Africa can be a huge engine for growth, not only for itself, but for the benefit of the global economy. And it is precisely this mis-perception that has undervalued the African market and driven investors away. We call this “information arbitrage.”

SMEs account for 60% of the GDP of developed nations . . .

. . . they only account for 10% of Africa’s GDP

Doubts about Africa’s viability as a market are premised on metrics like GDP per capita. But GDP per capita does not capture the informal sector, which is so important on a continent where 95% of transactions are carried out in cash. GDP per capita would not have predicted that within a decade, Nigeria would have gained 60 million new mobile phone users.

In 1995, New York had more mobile phones than the entire African continent . . .
this year, Africa will have as many mobiles as North America

When we look at the rise of India and China, it wasn’t only development money that precipitated their rapid growth. It was also faith in Indian and Chinese businesses to cater to their indigenous needs. And with that faith, the middle-class emerged, and these businesses captured their growth, eventually moving on to capture international markets.

Facing similar income inequality, government bureaucracy and infrastructure challenges, Africa can leverage India’s experiences in creating low-cost business models and a dynamic workforce which can drive Africa’s growth.

Africa’s collective GDP is predicted to grow by 63% between 2008 and 2020

- McKinsey

African households earning $5,000 or more will have grown by 80% by 2014, since 2000

- McKinsey

Yet, in the words of former UN Secretary-General Kofi Annan, “Africa’s profitability is one of the best kept secrets in today’s world economy.”

Within African industries, the telecomm sector has gained the most attention. A need for commercial capital in other sectors, meanwhile, lingers.

The healthcare sector has so far been neglected by mainstream commercial capital. Last year, AIDS claimed 1.4 million lives in sub-Saharan Africa. Malaria kills 125 children every hour. A Boeing 737 carries 125 passengers. Imagine every hour, we have a plane crash.

Malaria doesn’t target the young alone and adult deaths cost families across sub-Saharan Africa an estimated $12 billion in wages every year.

Africa accounts for a quarter of the world’s disease burden, yet only accounts for 1% of its health expenditure. This needs to change.

"Today, as I sip my Rwandan gourmet coffee and wear my Nigerian shirt here in New York, and as European men eat fresh Ghanaian pineapple for breakfast and bring Kenyan flowers home to their wives, I wonder what it will take for Western consumers to learn even more about the products of self-sufficient, hardworking, dignified Africans."

- Dr William Easterly

21st September, 2010