Investment protection in ASEAN: how a layered approach can work

ASEAN is an operating environment that requires careful navigation and risk management, not least because of increasing geopolitical shifts. Investors need to be inventive and creative by adding new layers to any existing protections they may have in order to safeguard their investments and minimize unwanted disputes.  

In recent years we have seen a growing number of disputes between ASEAN states and investors, especially in the energy, infrastructure, and mining sectors. In part, this is a natural consequence of the scale of commercial and investment activity in a region whose economies have grown exponentially in the last three decades, and, along with it, rising engagement between foreign private capital and domestic business entities in ASEAN. 

There has been a surge in investment from outside the region and within it; foreign direct investment (FDI) inflows into ASEAN reached an all-time high at USD224 billion in 2022, despite a 12% decline in global FDI amid geopolitical crises, heightened inflation and post-pandemic economic uncertainty. Intra-regional FDI continued to expand, reaching USD28bn the same year, making it the second largest source of investment after the United States. 

Within this activity we are seeing a growing number of foreign entities investing in partnership with state-owned enterprises (SOEs) or family-owned conglomerates (often with long-standing government ties) in order to access strategic sectors, leverage local expertise, and foster regional integration. 

Protecting investments against unexpected and unwanted disputes should therefore be front and center of any investor’s approach to tapping the many opportunities in ASEAN, from renewable energy and infrastructure to electric vehicles and digital commerce.  

Moreover, greater forethought and research may be required to protect against downside risks in ASEAN than in jurisdictions where there may be more established and standardized ways to structure investments. That is because contractual safeguards may not be sufficient to achieve an adequate level of protection. For example, even if contracts provide for arbitration in Singapore, which is often considered the safe choice for dispute resolution in ASEAN, the unpredictable stances taken by some courts in the region mean that a smooth enforcement of any award cannot always be guaranteed.  

Further, where the dispute arises from the acts of the state, such as the introduction of new legislation, the cancellation of a license or deficient local court proceedings, parties may not have the contractual relationship with the relevant state entity involved.   

To maximize protection in circumstances where contractual safeguards fall short, different options must be considered. The “layering” of protection, for example through investment treaties and insurance, is therefore a prudent part of an investor’s toolkit.

Investment treaty protections

Many investors are likely broadly familiar with investment treaty protections. Yet they are often overlooked. 

Investment treaties are agreements between two or more states that establish the terms and conditions for foreign investment in each other's territories. They can offer additional protection to investors beyond contractual rights or resorting to local courts by providing guarantees under international law of fair and equitable treatment, non-discrimination, compensation for expropriation, access to international arbitration, and enforcement of awards.

While investment treaty arbitration has been a feature of the legal landscape for decades, its appeal is increasing in Southeast Asia for three reasons.

First, more businesses in the region are observing what's happening in other parts of the world such as Europe and South America, where such protection is more widely used. In parallel, more Asian investors are bringing claims, and more Asian states are facing claims, than ever before. As a result, in ASEAN we are seeing more requests from our corporate and project clients for our views on investment treaty protection as part of our advice on deal structuring.

Second, there has been a marked increase in recent years in intra-Asia investment activity, with the result that more opportunities for disputes arise within the ASEAN sub-region. Previously, such friction was largely confined to cases arising from inward investment involving U.S. and European counterparties.  

Third, with the increase in the number of investment treaty arbitration cases, including those involving Asian states and investors, clients have come to view this more as another layer of protection in the toolbox and less as a last resort with potential for irreparably damaging the relationship with the investment host state.

To determine if an investor is adequately protected by investment treaties, it is important to consider a few key questions.

First, an investor should check whether there is a bilateral investment treaty (BIT) or a multilateral investment treaty (MIT) between the host state and the home state where the investor is domiciled.

If the answer is “yes”, the next key question is whether the investor’s investment will be protected by that treaty. Every treaty, like every contract, is unique and should be considered on its own terms. 

Most investment treaties define the term “investment” broadly, such that any type of asset may qualify for protection, including intangible assets such as financial products and contractual and intellectual property rights, in addition to more traditional types of investments like factories, real property and shares. 

However, some treaties, especially more modern ones, have more confined definitions of the term, requiring, for example, that the investment entail contribution of capital, sufficient duration, and assumption of risk.  

Similarly, although most treaties offer broad investment protections, an investor must consider the specific wording of the treaty in question to ascertain the extent to which its investment is protected. For example, “fair and equitable treatment” is the most often invoked and most often successful ground for a treaty claim. This can protect investors from a wide range of state conduct, including a state’s act which goes against an investor’s legitimate (or reasonable) expectations at the time of investment. This protection has been successfully relied upon by investors in situations involving a sudden and drastic change in state legislation, significant breaches of key contractual obligations, or a fundamental violation of due process. 

However, some investment treaties expressly limit the reach of this protection. 

All 10 member states signed in 2009 the ASEAN Comprehensive Investment Agreement (ACIA), a regional treaty which aims to promote and protect investment flows within the region. The ACIA contains a qualification which appears to limit fair and equitable treatment to cases of “denial of justice” in legal or administrative proceedings. This is a significant restriction, and investors should therefore consider if they have access to a more beneficial treaty.

Finally, another issue to consider is the question of attribution. 

When claiming against a state, an investor must establish that the wrongful acts committed are attributable to the state. 

The range of acts that fall under this definition may go beyond the acts of the state organs (such as the executive, legislature, and judiciary). For example, actions by SOEs or sovereign wealth funds (SWFs) may be attributable to the state if they exercise governmental authority or act under the state's direction or control. Again, however, some treaties may contain a bespoke attribution provision, which limits the state’s responsibility to the acts of its organs or its central and regional governments.  

Consequently, a prudent investor should not stop their analysis at the first step of checking whether a layer of protection exists through an investment treaty between the host state and its home state. It should go further and test the strength of that layer, by reference to the specific terms of the treaty or treaties in question, and with the help of investment treaty specialists where appropriate. 

Insurance protections

Insurance can provide another layer of risk management, and, like investment treaty protections, is increasingly popular in the ASEAN region. Again we are seeing more client queries on the issue as well as more insurance providers targeting the ASEAN market. 

Insurance comes in various forms, including arbitration award default insurance, which addresses the risk of non-payment of an arbitration award by a state. This is a relatively new and innovative product in Asia and provides increased certainty for investors who face enforcement challenges. In ASEAN, local courts may be reluctant to recognize and enforce arbitration awards, particularly where a state asset is involved.

Another form is “after the event” (ATE) insurance, which covers the insured’s legal liability for adverse costs that may be incurred if the litigation or arbitration is unsuccessful. 

A third option is contingent risk insurance, which covers specific, identified risks that are low probability but high in severity. This may be standalone or paired with a transaction to cover specific risks for which neither party will accept financial responsibility. For example, contingent risk insurance can cover the risk of a regulatory body determining that a business has been operating without the necessary permits or licenses, or the risk of an adverse interpretation of a law which can impact a business’ contractual entitlement to payment. 

Finally, there is political risk insurance, which covers the risk of adverse political events or actions that affect the investment, such as expropriation, nationalisation, breach of contract, currency inconvertibility, or civil unrest. 

Political risk insurance can provide compensation and protection for investors who face political instability or interference in ASEAN, where governments may change frequently or unpredictably, or may adopt measures that harm the investment. It can also act as a deterrent or a catalyst for dialogue and resolution, as insurers may have influence or leverage over the state or the entity, or may facilitate negotiations or mediation.

Conclusion

Investing in ASEAN offers significant opportunities, but investors should be aware that the environment – including the geopolitics affecting it – can carry very real and often unforeseen risks for foreign investors.

In response, layering investment protection – and, specifically, incorporating it into the commercial drivers of a deal – can help minimize financial risk when investing in the region. 

There is no one silver bullet when it comes to layering in such protections. Nor are the solutions complex. The key is awareness of the toolkit and how it can help.