A catalytic effect: inbound investment in PNG set to rise following embrace of international arbitration

Papua New Guinea is the latest nation state to accede to the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York Convention). 

In so doing, and by heeding the guidance of international financiers and investors, the country markedly has improved its inbound investment profile and enhanced its attractiveness as an investment destination. This move by PNG also is a timely reminder of the value of international arbitration in providing a stable, efficient and ‘bankable’ method of resolving investment and project-related disputes.

An update to PNG’s arbitration legislation is overdue. The existing 1951 Arbitration Act (Act) pre-dated the huge growth in foreign investment in the resource-rich nation, best illustrated by the US$19 billion ExxonMobil operated PNG LNG Project, which commenced production in 2014. 

Due to its many limitations, parties (both domestic and foreign), rarely arbitrated under the Act. Instead, disputes were resolved through the courts or, in the case of disputes between foreign investors and the State, by relying on international arbitration rules such as those established under the United Nations Commission on International Trade Law (UNCITRAL). 

Further to the perceived deficiencies of the Act itself, there are no arbitral institutions to support arbitrations seated in PNG, requiring them to be conducted on an ad hoc basis or by foreign arbitral institutions. Accordingly, while it has been common for investors in PNG (particularly those contracting with the State) to select arbitration as their preferred dispute resolution mechanism, such arbitrations typically were seated in other Asian centres such as Singapore. 

Perhaps the greatest concern regarding PNG-related disputes, however, has been the difficulty associated with enforcing arbitral awards in the country. Now that PNG has become a signatory to the New York Convention, this is set to change. Once the now outdated Act is replaced in order to introduce a mechanism that recognises international arbitral awards, the ability to enforce arbitral awards in PNG is set to become more certain and efficient. This will give comfort to foreign investors, and be a fillip for the many large-scale oil and gas and resources projects mooted for the country. 

Foreign investment linked to international arbitration

A strong commercial arbitration framework improves foreign investment. One only has to review the decisions of the multitude of global financiers, equity investors, development banks and export credit agencies to understand the criticality of a reliable and stable dispute resolution framework. 

Being able to enforce an arbitral award in the country in which an investment is made is an essential factor in many final investment decisions, and if the country in question is not a signatory to the New York Convention, any such investment decision is fraught. 

Once seen as revolutionary, the New York Convention has proved to be one of the most successful international treaties, with 160 signatories to date. It creates a familiar and trusted regime which offers substantial additional comfort to business. 

At the South Pacific International Arbitration Conference held in Port Moresby in March 2019, international economists expressed their support for PNG’s accession to the New York Convention, noting the increases in foreign investment that have been shown to flow to a country once it ratifies the New York Convention. 

But international, cross-border investment decisions are not limited to issues concerning enforcement. When making investment decisions, international investors often consider whether a country is supportive of commercial arbitration, including whether the local courts will intervene in the interests of local parties, whether State or private. 

PNG has recognised the need to create the right climate to attract inbound investment. Despite its exports of gold, copper and LNG, it has been ranked 108th out of 190 countries by the World Bank in its 2019 ‘Ease of Doing Business’ global ranking. Significantly, this places PNG behind many of its regional counterparts, including Fiji (101), Vanuatu (94), Tonga (91) and Samoa (90). 

ADB project for the South Pacific

PNG’s accession to the New York Convention has been widely and positively reported in the global community. In this regard, the Asian Development Bank (ADB) took something of a lead on behalf of the international investment community. 

In November 2016, the ADB released a Technical Assistance Report, which outlined its project of promoting international arbitration reform in the South Pacific to promote a better investment climate in the region.^[1] The ADB framework identifies three project outputs aimed to achieve increased foreign investor confidence, in turn leading to greater economic development of nations. 

PNG achieved the first project output in July 2019 when it deposited its binding instrument of accession to the New York Convention with the UN Secretary-General, and currently is working towards the second, which requires domestic legislative reform to give effect to the New York Convention and to reflect modern international commercial arbitration standards. Its focus will then turn to the third project output, being the strengthened capacity for international arbitration reforms, achieved by: 

• regional awareness building and dissemination workshops; and
  
  
• tailored trainings of arbitrators, lawyers and judges in international commercial arbitration and recognition of enforcement proceedings under the New York Convention. 

The path to legislative reform 

With support from ADB, PNG is developing a new Arbitration Act. At present, it remains unclear whether the current legislation will be repealed in full or in part, or whether it will remain in force for domestic arbitrations. 

While a draft of the proposed new Arbitration Act has yet to be released publically, a period of consultation is expected. It is anticipated that the new Arbitration Act will primarily be based on the UNCITRAL Model Law on Arbitration with additional features specific to PNG’s legal framework, such as the acknowledgement of customary law. 

Legislative reform, however, is not the end of the road. Programs to enrich the current expertise of local practitioners and the judiciary will be of immense value in ensuring a smooth transition. The Papua New Guinea Centre for Judicial Excellence provides an ideal platform for such activities.

While investors will continue to consider a multitude of factors when assessing opportunities in PNG, the country’s accession to the New York Convention and proposed modernisation of its arbitration regime significantly enhances its attractiveness as an investment destination. 

As can be tracked through many developing economies, it will not be a surprise to see the stabilisation of investment-related disputes via international arbitration having a strong, catalytic effect on inbound investment in PNG.