This page offers information on the scope and methodology of EIRA. Read about the different parts of the data collection and validation process and the scoring system.
Read the EIRA 2019 Executive Summary
EIRA assesses risks to energy investment that can be mitigated by adjusting legal and regulatory frameworks. It gives guidance to countries on how they can improve their investment climate and benchmarks their performance against international best practices.
EIRA evaluates three types of risks: (1) unpredictable policy and regulatory change, (2) discrimination between domestic and foreign investors and (3) breach of State obligations. It highlights the key strengths and areas for improvement in each country, gives recommendations to improve results, assists in designing risk mitigation plans, and influences governments to work towards such plans. EIRA recognises that various factors, which are outside its scope, can shape investment decisions. For this reason, it does not claim to give a complete picture regarding the investment prospects or attractiveness of a country. Similarly, it does not judge, predict or indicate if one country is better to invest in over another.
The target audience of EIRA is policymakers. Its objective is to assist them in (1) identifying policy and regulatory gaps and (2) taking action to attract the right investments in the energy sector. Additionally, it seeks to give the energy industry, investors and the financial sector insight into particular aspects of the investment climate in the assessed countries. That said, the findings of EIRA are not an alternative to the due diligence that companies must conduct before they invest in the energy sector of an assessed country.
The scope and methodology of EIRA 2019 are the same as last year. Like its predecessor, this second edition of EIRA does not delve into commercial and other market-related risks or geopolitical issues. Despite this, its application remains very comprehensive and covers investment across the entire spectrum of the energy sector. The scoring methodology is also the same as in 2018. All indicators carry equal weight and are the average of their component sub-indicators. Each sub-indicator is calculated through a set of questions that are scored between 0 to 100. The indicator scores are depicted through a five-band colour-coding.
The highlights and key findings of EIRA 2019 can be downloaded here.
EIRA methodology in a nutshell
EIRA evaluates specific risks to energy investment that can be mitigated through adjustments to policy, legal and regulatory frameworks. The performance of countries against the three EIRA risk areas is evaluated through four indicators. The indicators are constructed to reward countries for sound regulation and efficient processes. They capture the ability of countries to cope with the risks through various positive measures such as by setting predictable policy objectives, ensuring transparency in decision-making, establishing strong public institutions, developing competent market oversight mechanisms, and efficiently managing disputes with foreign investors.
The indicators are scored based on a questionnaire developed by the ECS over a period of two years. Pilot tests were undertaken to determine the soundness and interpretability of the indicators and the underlying questions. The draft questionnaire was administered to national experts, from different countries, seconded at the ECS. It was also shared with the Industry Advisory Panel of the ECS, various business councils, chambers of commerce, and law firms. Based on the feedback and opinions received, as well as the reaction of the actual respondents that participated in the 2017 EIRA edition, the questionnaire was significantly refined to enhance its quality.
The questionnaire for EIRA 2018 and 2019 is designed to ensure it is comprehensible to the respondents and that the information obtained is easily verifiable. It allows comparability across energy sub-sectors and captures trends over time. Most questions are binary, requiring simple “Yes” or “No” answers. Granular options are provided in some cases to obtain more detailed information. Moreover, respondents have the opportunity to offer additional remarks and brief descriptions of policy programmes (these questions are not scored).
The risks are primarily evaluated by examining whether necessary laws, policies and actions have been adopted by countries. However, legislation and policy measures will have maximum impact when they are enforced. EIRA 2019 recognises this and tries to give a clearer picture regarding the application of laws and policies. This year, the country profiles have been structured to better reflect the implementation of the existing policy framework and highlight the progress made by countries in translating their commitments to actions.
What are the risks assessed by EIRA?
Unpredictable policy and regulatory change
Governments reserve the right to adopt measures that are necessary for pursuing legitimate public policy objectives. Nevertheless, unsystematic and arbitrary modifications can detrimentally affect the interests of foreign investors. They can lead to increased or stranded costs for operating a business, reduced attractiveness for investment, and an overall distorted competitive landscape. Foreign investors may reconsider investing in the country or relocate the investment. It follows that in exercising their right to regulate, governments must make investors aware of the conditions and nature of policy changes.
Discrimination between domestic and foreign investors
Foreign investors need clarity on the extent to which markets are competitive and whether they offer a level playing field. While discrimination can take various forms, between energy resources, technologies and types of investors, EIRA focuses on discrimination between domestic and foreign investors. This includes the likelihood of an unfair advantage to local investors, as recipients of rights and privileges, to the exclusion of foreign investors. Discrimination may also occur in the form of ‘protectionist’ practices intended to restrain trade and give rise to foregone investment gains.
Breach of State obligations
Disputes brought by investors against a State can disrupt the relations between the two parties and even damage the overall investment climate. Investors must have confidence that they will have recourse to mechanisms for dispute resolution and the enforcement of rights if governments default on their obligations. Such obligations include protection against discrimination, expropriation and nationalisation, breach of investment treaties, and limited access to alternative dispute settlement avenues.
How are the EIRA indicators selected?
The indicators have been constructed from a wide range of variables. They bear direct relevance to a government’s overarching objective of creating a secure, favourable and transparent investment environment.
Five criteria are applied to determine the appropriate indicators:
Functionality/Actionability – Indicators are ‘reform-oriented’. They reflect best practices through which countries can manage the risks. They capture aspects of policy-making and regulation that are under the control of governments.
Data availability – Data for indicators is available from sources that are reputable and reliable. Indicators are based on data that is relevant, readily accessible and easy to collect.
Measurability – Indicators provide a quantifiable assessment. They are robust and unaffected by minor changes in the method used for their construction.
Comparability – Indicators allow comparability across (1) countries; (2) energy sub-sectors; and (3) the energy value chain. Additionally, they are consistent and comparable over time.
Objectivity – Indicators reflect an accurate overview of the policy, regulatory and legal reality in the assessed countries.
What are the EIRA indicators?
The performance of countries against the EIRA risk areas is evaluated through four indicators. The indicators are constructed to reward countries for sound regulation and efficient processes. They capture the ability to cope with the risks through various positive measures such as the creation of predictable policy objectives, transparent decisionmaking processes, the establishment of strong public institutions, development of competent market oversight mechanisms, and the successful resolution of disputes with foreign investors.
1. Foresight of policy and regulatory change: National energy priorities and regulatory frameworks evolve in response to changing circumstances. Meeting new objectives may result in policy revisions, and governments must be sensitive to the impact of such revisions on long-term investments. Ensuring stable conditions is a major challenge as the global energy transition is proving to be a highly dynamic process. Policy and investment patterns are likely to evolve as countries seek to decarbonise their energy sectors under the Paris Agreement. Managing this change is crucial, so governments must communicate any adjustments to their energy policy objectives and effectively plan and implement the means to pursue them. Investors can then better manage risk, modify investment portfolios and cope with the policy changes.
2. Management of decision-making processes: The second indicator addresses the importance of coordinated and transparent policies in eliminating perceived or actual opacity of government initiatives and the exclusion of investors from the planning and decision-making phases. To ensure structured and simplified decision-making processes the role and responsibilities of different governmental levels must be defined. It is also essential that investors are well informed and consulted whenever governments intend to revise laws or regulations. Stakeholder engagement allows foreign investors to participate in decision-making processes actively and take well-informed and timely decisions.
3. Regulatory environment and investment conditions: This indicator evaluates the independence exercised by energy regulators in their decision-making and other functions. Independence from national governments and the industry guarantees neutrality and helps to avoid situations where regulatory decisions are constantly revised to the detriment of some market actors and investors. It further examines the extent of restrictions faced by foreign investors in the energy sector. Despite the increasing realisation that international capital flows are crucial for the development of the energy sector, persisting restrictions act as serious deterrents for foreign investors. Key restrictions include screening and local content requirements, as well as limitations on currency and investment-related capital transfer, which tilt the playing field in favour of domestic investors.
4. Rule of law (compliance with national and international obligations): EIRA relies on the ‘rule of law’ definition presented in the UN Report “The rule of law and transitional justice
in conflict and post-conflict societies”. It focuses on three aspects of this definition. First, fair and effective implementation of national laws and international commitments arising from treaties and international agreements; second, settlement of investor-State disputes promptly and according to due process; and third, respect for the property rights of foreign investors. Peace, security and human rights are outside the purview of EIRA.
in conflict and post-conflict societies”. It focuses on three aspects of this definition. First, fair and effective implementation of national laws and international commitments arising from treaties and international agreements; second, settlement of investor-State disputes promptly and according to due process; and third, respect for the property rights of foreign investors. Peace, security and human rights are outside the purview of EIRA.
The indicators are cross-cutting and apply to more than one risk. Each indicator consists of two sub-indicators. They measure the ability of governments to identify whether the assessed risks exist and the extent to which they can be mitigated. The indicators reward countries for taking positive measures that manage and limit arbitrary or discriminatory policy changes which could result in a breach of State obligations. Such measures include designing and setting long-term policy objectives and goals, ensuring transparency in decision-making, granting equal treatment to foreign and domestic investors, and effectively managing disputes with foreign investors.
How are risks assessed in EIRA?
EIRA relies on a blend of quantitative and qualitative analysis. The quantitative analysis is performed using a scoring system that conveys the performance of the countries on the indicators. The more complex dynamics of the assessment are represented through qualitative country profiles that identify areas for improvement using narrative and visuals.
Scoring system
All indicators carry equal weight. The total for each indicator is the average of its component sub-indicators. Each sub-indicator is similarly calculated through a set of questions. The questions are scored between 0 and 100 and are equally weighted. The highest achievable score for each question is 100. The overall performance across each indicator is defined as the average of first, the score received in the government questionnaire; and second, the combined average of the external party scores.
Country profile outline
The qualitative assessment for each country is visualised through a four-page profile. The initial two pages provide an overview of the country. They feature a table of the country’s key metrics and three charts. The metrics include demographic, economic and energy information and give a
background to the country’s profile. The first chart illustrates the risk level across the assessed areas. It is followed by a bar chart that shows the performance of the countries on each of the four indicators. A 5-colour coding approach is used for this purpose. Dark green represents the highest band of scores while red represents the lowest. The third chart breaks down the country’s performance across the sub-indicators, where 0 denotes the weakest and 100 the strongest performance. The remaining pages of the profile offer a detailed analysis of the country’s performance on each indicator. They present the overall score for each indicator and summarise the key strengths and areas for improvement.
How are the respondents for EIRA selected?
The EIRA questionnaire is provided to the governments of the participating countries. To counter the perception of self-assessment and secure an objective viewpoint, it was also sent to selected external parties in the assessed countries.
The unit of analysis for EIRA is a country. The policies taken into consideration are those framed and implemented at the national level. In federal arrangements, the central government is designated as a single point of contact responsible for collecting and processing inputs from relevant ministries/departments at State and municipal level.
External parties are chosen from a pool of experts comprising local and international law firms, legal practitioners, business councils, accounting and consulting firms, think-tanks, energy associations, chambers of commerce, international institutions and non-governmental organisations operating in the assessed countries. In 2019, over 550 external parties were contacted of which 21 per cent were selected based on their expertise, availability, and willingness to participate. Extensive research was conducted before the final decision.
The main parameters for selecting the external parties are:
Expertise in the energy sector: Active involvement in different stages of energy projects, and experience of providing consulting services in multiple energy sub-sectors and on regulatory issues.
Diversity of clients and neutrality: Vast experience working with governmental entities as well as private investors. This ensures the external party has a holistic understanding of issues in the energy sector and contributes to a more balanced approach.
Reputation: Parties with extensive global reach or local partner groups. For law firms, international guides identifying leading providers of legal services (local and global) in each country are consulted.
What is the data collection and validation process for EIRA?
Data for EIRA is collected in a standardised manner. For the 2019 edition, responses from the participating countries and external parties were collected over a period of five months.
The respondents provided copies of the source documentation and translations (if required) that supported their responses.
The data provided was accepted only to the extent that it was premised on original laws, regulations, national plans and strategies. Legislative initiatives and regulatory reforms not legally in force on 1 April 2019 were not taken into consideration.
Upon receipt of the questionnaires, the ECS in-house investment, legal, regulatory and energy efficiency experts engaged in an extensive process of validating information provided during the survey. In particular, it was confirmed that each question was correctly understood by the respondents and that the documentation submitted supported the response given. In the absence of documents, or in the case of conflicting answers, clarifications were sought through correspondence and phone interviews with government officials and external
parties. Answers obtained were once again reviewed and cross-checked for consistency with known elements of each country’s investment policies and energy sector.
Efforts were made to address the issue of low data availability. In certain countries, fact-finding missions were undertaken to obtain hands-on information. The purpose was to gain
insight into their regulatory and investment environment as well as obtain the views of different stakeholders in the energy sector.
Overall, the process of data collection and validation lasted seven months, from December 2018 to July 2019.
