Global law firm Baker McKenzie has developed a guide outlining key considerations for investors in the event of nationalization and debunking commonly-held misconceptions about the practice, in a guide titled, “Preserve, Protect, Defend. Global Nationalization Risk: Practical Considerations for Investors.”
With governments now intervening in economic activity on a previously unimaginable pace and scale, the issue is more relevant today than at any time in the recent past. The report draws upon the collective knowledge of more than 1,100 of Baker McKenzie’s disputes lawyers across the world and top experts in the geopolitical and economic field.
“Nationalization was already beginning to figure as a commonly-used tool by governments after decades out of favor and the current tidal wave of state economic support through the COVID-19 crisis means investors must stop presuming nationalization can't happen in countries without a history of expropriations. This report puts the topic of nationalization in a global context, in part due to requests from clients regarding how to protect their assets during a growing tide of nationalization worldwide.” states Ed Poulton, Global Chair of the International Arbitration Group at Baker McKenzie.
With the assistance of geopolitical commentator, business advisor and co-founder of Global Torchlight, David Chmiel, the report tackles four important misconceptions that investors must move past when considering the ever-growing debate about nationalization:
1. Nationalization risk is limited to countries with weak political and legal systems: The debate over state vs. private ownership is increasingly being played out in the developed countries that have championed privatization over the previous decades. France announced it is ready to nationalize corporations if necessary, while the UK has temporarily nationalized its railways. Emerging economies are also once again turning to nationalization as countries in Latin America and Southeast Asia flirt with the takeover of natural resources and other industries.
2. Nationalization policies focus on natural resources companies: While natural resource nationalization frequently grabs headlines, they are not the only sectors susceptible to the practice. During the first years of the Great Recession, banks and insurance companies came under state ownership to restore public confidence, while public utilities are increasingly under review as politicians argue that extended private ownership leads to high prices for consumers and a lack of incentives to invest in new infrastructure. Currently transport companies including the world's biggest airlines are turning to state handouts to save them from insolvency. The lesson from the financial crisis is that state participation in a sector is sticky and takes years rather than months to unwind.
3. Nationalization is driven only by economic concerns: Nationalization risk is not necessarily minimized by a strong economy. Following the 9/11 terrorist attacks, both the US and Canadian governments nationalized airport security screening and created agencies to carry out those functions. Gradually, governments have come to question the equity of bilateral treaties, arguing they favor multinationals over nation-states, while others view that resolving global problems like climate change can only be accomplished through the government taking control of contributing industries.
4. Nationalization is carried out only by expropriation: Although expropriation is common, less overt methods, such as letting operating licenses expire prohibiting foreign investors from renewing them, or altering criteria to favor domestic or state bidders in reprocurement exercises also figure as devices of nationalization. The other route to nationalization as is being seen now is to save entire industries from oblivion caused by unforeseeable events such as the current global pandemic.
Through examinations of five case study jurisdictions where the debate around nationalization is on the center stage – Argentina, Indonesia, South Africa, the UK and the US – investors can learn the different aspects of the debate, and the motives under which these jurisdictions are operating.
"Governments are undertaking temporary de facto nationalizations of large swathes of their economies to prevent collapse through the shutdowns required to flatten the current pandemic's infection curve," said Ed Poulton. "This is accelerating and scaling up a trend that was already there and investors expecting a swift return of all assets to private hands may be in for an unpleasant surprise, given strong levels of political support even in a country such as the UK for nationalized railways, for example."
The full report is available here.