In recent years there has been a boom in foreign direct investment in Latin America-as GDP rates grow (most in the 6 to 9 percent range), and trade deficits decline.

Somewhat coincidentally, the United States embarked on a campaign to enter into agreements providing protection to investors with as many Latin countries as possible. With the free trade area of the Americas (FTAA) stalled, the United States has entered into CAFTA-DR (with the countries of Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua and the Dominican Republic), recent free trade agreements with Perú, and Colombia, with bilateral agreements soon expected with Panama, and possibly Ecuador.

At the same time, political, economic, and security issues are at the forefront of investor concerns. In the most recent elections there has clearly been a shift to the left side of the political spectrum (Evo Morales in Bolivia joins Alfredo Palacio in Uruguay, Luis Ignacio Lula Da Silva in Brazil, Michelle Bachelet in Chile and, most notably, Hugo Chávez in Venezuela).

The convergence of these factors makes this perhaps the most exciting time in Latin American investment history. It also clearly signals that investors should beware.

Strategic planners responsible for Latin American investments need to have a firm grasp on four sets of factors: stability, market access opportunities, protections available and managing dispute settlement options.

Political stability in countries such as Bolivia, Ecuador and Peru could be described as fragile. The term “political stability” encompasses not only political unrest, but also more mundane obstacles that an investor might face, such as judicial predictability (whether the court system functions transparently, independently and consistently) and administrative/regulatory/legislative predictability (transparency and corruption-free functioning).

There are a lot of unhappy poor people in Latin America who are demanding accountability from their governments as well as multinationals who they perceive to be the primary beneficiaries of natural resource wealth. There is also the issue of physical security, even as the violence in Colombia seems to be turning the corner. Ultimately, the benefits and protections available in free trade and bilateral trade agreements may only be as good the political situation allows.

Investors also need a clear understanding of what market sectors are open to foreign investment, and whether there are limitations on ownership or management. For example, it is not unusual in Latin America to restrict a foreign investor's ownership in mines (and restrictions may take the form of a limited concession to explore, with no ownership rights).

Where an investor is considering investing in a country that does not have such an agreement, there should be an extra layer of review of the contracts that investors are normally required to enter into. One interesting innovation, present in at least Perú and Colombia, is the “stability contract” whereby investors are guaranteed, for a contractual premium, that actions such as “pesofication” or other exchange rate [emergency] government measures, will not apply to their contracts.

The substantive protections available to investors under investment provisions are fairly standard. These obligations are only as good as the dispute settlement provisions that grant investors the right to arbitrate claims. It is important to note that these dispute settlement provisions, for U.S. domestic policy reasons, underwent significant clarification in recent years and place procedural (and arguably substantive) burdens on investors. For example, provisional measures to dismiss frivolous claims have been incorporated to allow early dismissal of non-meritorious claims (investors could previously count on being able to arbitrate jurisdictional issues with the merits of the case); transparency provisions allow non-parties to participate in the proceedings (hearings must be open to the public and non-parties may submit briefs on issues).

Judicial predictability is a key environmental factor, and there is no guarantee that domestic Latin American courts will not exercise jurisdiction, that will, at the very least, delay arbitration proceedings. The scope of coverage of these and other protections require careful scrutiny by investors considering a move to Latin America.

It is an auspicious time for investors in Latin America, with a number of important agreements that provide market-opening opportunities as well as safeguards for investments. But, investors need to also be aware of the twin pitfalls of political and economic security as governments change across the region. The agreements may provide protections against these pitfalls, if investors do their homework. wt



Mélida Hodgson is a counsel at Miller & Chevalier, Chartered, and is a former associate general counsel at the Office of the United States Trade Representative where she was responsible for government procurement, trade and investment negotiations and litigation.