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Columbia FDI Perspectives
Perspectives on topical foreign direct investment issues
No. 210 October 9, 2017
Editor-in-Chief: Karl P. Sauvant ([log in to unmask])
Managing Editor: Matthew Schroth ([log in to unmask])
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Complex contracts between governments and foreign investors, covering large-scale projects especially in natural resources, agriculture and infrastructure, define the long-term relationship between the parties. It is therefore important that they are negotiated with a view to the allocation of benefits and responsibilities for years to come. Well-defined regulatory frameworks establishing clear parameters are crucial, but even then developing countries and economies in transition (“emerging markets”) often need to undertake fine-tuning negotiations. Moreover, they depend on mobilizing their limited assets to reach the Sustainable Development Goals (SDGs).
Negotiating such contracts is a challenge under any circumstances. Take minerals as an example: geologists need to ascertain the quality of a deposit; industry specialists assess market conditions, investors’ strategies and prices; financial analysts model trade-offs between, say, royalties and income taxes; other specialists evaluate environmental and social impacts; and, naturally, host countries need experienced lawyers to negotiate the terms of contracts (including renegotiation provisions) with the world-class advisors typically available to large foreign investors. Governments face challenges from lack of expertise, an imbalance of financial resources, time pressure, and the potential for corruption.
Many emerging markets negotiating with foreign investors simply do not have the human and financial resources to negotiate the best possible deals.[1]
Bad contracts eventually lead host countries to become dissatisfied, particularly if not receiving a fair share of the economic benefits of a project. This can result in conflicts that negatively affect both the credibility of future government commitments and the operations of existing investors. Good contracts are therefore beneficial for both host countries and investors.
Conflicts, furthermore, can escalate into costly international arbitrations under dispute-settlement clauses in the contracts themselves, host country legislation or investment treaties. The International Centre for Settlement of Investment Disputes had registered 597 disputes by the end of 2016; of these, 29% involved extractive industries and agriculture and 44% infrastructure (electrical power and other energy; water, sanitation flood protection; construction; transportation; information; communication)[2] – typically large-scale projects. Arbitration costs are normally high (especially in extractive industries), awards can be in the hundreds of million dollars and countries’ reputations can be damaged – and all this in addition to possible disruptions to the projects themselves.
What to do to arrive at good contracts that are more likely to last?
Providing information to negotiators of emerging markets helps. At least for natural resources, CCSI has established a Negotiation Support Portal that provides useful information to negotiators. It “aims to address the information-sharing and coordination gap by improving the accessibility and visibility of useful tools & resources and technical support available to assist governments in the investment process.”[3]
But, in the end, good contracts depend on the ability of host countries to field experienced negotiation teams.
No institution currently provides governments with comprehensive, multidisciplinary negotiation support on short notice (if need be) regardless of economic sector or geographic region. Only partial support is available for resource-constrained host countries, for example, through the African Legal Support Facility and the International Senior Lawyers Project.
Importantly, therefore, Germany established the CONNEX Support Unit early 2017 “to provide assistance to governments of developing as well as transition countries in negotiating, renegotiating or implementing large-scale, complex investment contracts…. It aims to provide rapid, independent, high-quality, and multidisciplinary support” to requesting governments, “…to arrive at stable contracts that are commercially viable and contribute as much as possible to the sustainable development of host countries”.[4] The Support Unit has begun to assist in identifying experts, funding their work and exercising quality control. It is a facilitator.
The challenge is making this ambitious facility an effective and credible institution that gains the trust of potential clients and builds a record of success that demonstrates its utility. It should not become a large unit nor house its own experts. Rather, it should rely on top-level external experts and the cooperation of other institutions with such expertise. It needs to concentrate on its core competence of assisting in actual negotiations. Its success depends on being administratively agile and independent of influence by investors and their home country governments. Its experts must be able to help prepare negotiating positions and advise on options for decision-making by host country governments (including that it may be advisable not to conclude a given contract), but they must not see themselves as decision-makers. On-the-job training of local staff should be explored to help build local capacity, including for monitoring the contracts negotiated.
Negotiation parties need to arrive at mutually beneficial, durable contracts that are commercially viable and help mobilize the domestic resources host countries require to achieve the SDGs. Any assistance host countries can get from any facilitator to arrive at good contracts is very desirable.
* The Columbia FDI Perspectives are a forum for public debate. The views expressed by the author(s) do not reflect the opinions of Columbia Center on Sustainable Investment (CCSI) or Columbia University or our partners and supporters. Columbia FDI Perspectives (ISSN 2158-3579) is a peer reviewed series.
** Karl P. Sauvant ([log in to unmask]) is Resident Senior Fellow, Columbia Center on Sustainable Investment, a joint center of Columbia Law School and the Earth Institute, Columbia University, and member of the informal CONNEX Advisory Committee. In preparing this Perspective, the author benefitted from discussions with Peter Conze, Natty Davis, Boris Dolgonos, Herbert M’cleod, Helmut Nicolaus, and Lou Wells (his co-members of the informal CONNEX Advisory Committee); Günter Nooke and Felix Reifschneider (Germany’s Ministry of Economic Cooperation and Development (BMZ)); and Torge Hamkens and Juliane Weymann (CONNEX Support Unit). He is also grateful to Kamal Hossain, Marcelina Joel and an anonymous peer reviewer for their helpful peer reviews.
[1] Even developed countries at times lack the in-house human resources to negotiate large-scale contracts, but they have the financial resources to hire the expertise required.
[4] See http://connex-unit.org/mandate-2-2/. The establishment of CONNEX by Germany’s BMZ is the outcome of a process that began some 20 years ago at UNCTAD, continued in 2006 at Columbia University, subsequently involved, importantly, the Humboldt-VIADRINA School of Governance (Peter Eigen), and was introduced into the G7 in 2014.
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The material in this Perspective may be reprinted if accompanied by the following acknowledgment: “Karl P. Sauvant, ‘The importance of negotiating good contracts,’ Columbia FDI Perspectives, No. 210, October 9, 2017. Reprinted with permission from the Columbia Center on Sustainable Investment (www.ccsi.columbia.edu).” A copy should kindly be sent to the Columbia Center on Sustainable Investment at [log in to unmask].
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For further information, including information regarding submission to the Perspectives, please contact: Columbia Center on Sustainable Investment, Matthew Schroth, [log in to unmask].
- No. 209, Catharine Titi, “A stronger role for the European Parliament in the design of the EU’s investment policy as a legitimacy safeguard,” September 25, 207.
- No. 208, Lisa Sachs, Jeffrey Sachs and Nathan Lobel, “Corporations need to look beyond profits,” September 11, 2017.
- No. 207, Lilac Nachum, “How much social responsibility should firms assume and of which kind? Firms, Governments and NGOs as Alternative Providers of Social Services,” August 28, 2017.
All previous FDI Perspectives are available at http://ccsi.columbia.edu/publications/columbia-fdi-perspectives/.
Other relevant CCSI news and announcements
- On October 25, 2017, CCSI and KPMG will co-host the launch of the brand new edited volume, published by Columbia University Press: The New Frontiers of Sovereign Investment. This book provides expert opinion and analysis of the major current debates around sovereign wealth funds (SWFs), particularly: the extent of their domestic investments, their involvement in financing infrastructure investments and other developmental priorities, how existing policy and operational models need to be adjusted in the context of developing countries, and the role and practices of sovereign wealth funds in the emerging field of socially-responsible investment. A panel of SWF experts and practitioners will discuss the most topical questions raised by the book and participants will then have the opportunity to engage in the conversation. Registration is free, but required. For more information, and to register, please see our website here.
- On October 31, 2017, CCSI and the Columbia International Arbitration Association (CIAA) will co-host a talk with Jan Dalhuisen at Columbia Law School, during which he will discuss the complex role of international arbitrators in international commercial and investor-state dispute settlement. Please see our website here for more details. No registration necessary.
- CCSI is announcing a Call for Papers for the edition of the Yearbook on International Investment Law and Policy covering 2017. Submissions will be accepted on a rolling basis until February 1, 2018. Please see details here.
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Karl P. Sauvant, Ph.D.
Resident Senior Fellow
Columbia Center on Sustainable Investment
Columbia Law School - Earth Institute
Ph: (212) 854-0689
Fax: (212) 854-7946
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