Research highlights rule of law risk in energy-rich states

The findings come in risk analysis and mapping firm Maplecroft’s annual Rule of Law Index. The index combines indicators on judicial independence, judicial effectiveness and the efficacy of the regulatory system to assess the risk to business from the application and enforcement of regulation in a country.

A total of 19 countries have been rated as ‘extreme risk’ in this year’s index, including energy-rich countries Burma (ranked number 1), South Sudan (4), Turkmenistan (5), Libya (10), Angola (13) and Iraq (18). Oil and gas companies operating in these countries face significant legal and financial risks, particularly in respect of unreliable contract enforcement and expropriation.

According to Maplecroft, contracts in these countries are not always respected, which can lead to increased legal costs for companies and compromise returns on investment. Expropriation also remains a risk, especially in the extractive sector, where populism in resource-rich countries, coupled with a government desire to capitalise on high global commodity prices, is fuelling policies of nationalisation.

Burma, for example, offers great potential for oil and gas firms with its recent political reforms and the likelihood of sanctions being lifted. However, it has topped Maplecroft’s Rule of Law Index for the last five years and the Burmese government continues to dictate policy direction and judicial decisions.

Tangible improvements in the rule of law, including increased judicial independence and greater transparency in the regulatory system, will be required before the long-term potential of the economy can be realised, said Maplecroft.

Despite this law firms are increasingly seeking opportunities in countries with rich natural resource opportunities, particularly in North Africa (16 January 2012).

Maplecroft’s findings also identifies emerging and developing economies whose rule of law is strong and offers a promising investment climate, such as South Africa (ranked at 157), Namibia (158), Chile (164) and Botswana (167).

In addition, the index also sheds light on the rule of law in BRIC countries. Russia (58), China (59) and India (65) are rated as ‘high risk’, while Brazil’s ranking has improved from 80 in 2011 to 92 in 2012, moving away from the ‘high risk’ category to ‘medium risk’.

China demonstrates an effective judicial system, according to the research. The World Bank’s Doing Business 2012 report noted that it takes an average of 406 days at a cost of 11 per cent of the total claim to enforce a contract in China, compared to an OECD average of 518 days at a cost of 19.7 per cent of the claim.

However, the country ranked among the 10 highest-risk countries in Maplecroft’s Judicial Independence Index. The inconsistent application of regulations and inadequate enforcement contribute further to the inadequate rule of law in China.

The 10 most extreme risk countries in the index are Burma, North Korea, Somalia, South Sudan, Turkmenistan, Cuba, Cambodia, Afghanistan, Syria and Libya.

The 10 lowest-risk countries in the index are San Marino, Malta, Andorra, Luxembourg, Monaco, New Zealand, Austria, Germany, Norway and Australia.