Developing countries must negotiate the best
possible investment contracts with foreign
investors at the outset. Contracts determine the
obligations of host countries and investors and
the distribution of benefits between them for
years to come.
Contracts for mining and infrastructure can be
highly complex, involving specialized technical
agreements. Their subjects range from the division
of revenue to financing, pricing, construction,
operating obligations, environmental commitments,
and responsibilities at eventual closure.
Developing countries rarely have the expertise in
all these fields to match that available to
international investors.
The results of negotiations are, therefore, often
sub-optimal for host countries. At one time,
initial contracts could relatively easily be
renegotiated. Today, the availability of
investor-state dispute settlement (international
arbitration) makes it difficult to
change contracts once they are concluded,
hence the importance of getting deals right at the
outset.
Donor organizations regularly push for “capacity
building” to create technical expertise for
negotiations within host country governments. That
expertise can cover financial analysis, industry
knowledge, engineering and geological evaluation,
environmental analysis, legal expertise,
regulatory skills, and more. But building and
maintaining technical expertise within a
government is a time-intensive and costly
undertaking, and it often fails.
Does it make sense to try to build all these
technical skills within a government? Experience
suggests caution:
- Many
countries negotiate contracts of a particular
type only sporadically. The cost of building
and maintaining all the necessary skills
in-house may not be justified.
- Retaining
the skills is often difficult. Better salaries
in the private sector, at home and abroad,
attract trained professionals away from
government. Although many officials may not be
moved by better offers, loss of skilled
personnel to the private sector or
international institutions is frequent.
- Even
those who remain in government are, in many
cases, rotated away from the positions in
which their skills are needed.
- Deep
expertise is built from experience over many
years. Keeping expertise up-to-date requires
regular engagement in practice, but frequent
use is often uncommon in government.
- Even
when countries have sectoral ministries (e.g.,
ministries of mines or infrastructure) and
state-owned technical agencies that possess
some of the needed technical expertise,
tensions between government entities may make
it difficult to draw on them for negotiations.
- Few
“capacity building” attempts actually build
much capacity. To be effective, they are best
organized and supervised by specialized
entities that can create pedagogically
sensible syllabuses, call on materials
developed for teaching purposes and bring
instructors who encourage exchanges among
participants. Simply organizing a chain of
presentations by experts is not likely to be
effective. An hour or even a day of lecture on
building financial models cannot make an
official capable of constructing useful
models. At best, it can convey a sense of
skills that are lacking.
- Investors
do not attempt to develop all expertise they
need in-house. They bring in outside legal
experts for mergers and acquisitions and
international arbitrations, and they hire
engineering consulting firms for designing or
valuing projects. If the skills are needed
only infrequently, they are best hired from
outside.
Of course, building certain technical expertise
internally may be worthwhile for governments that
negotiate particular types of investment contracts
regularly. For this purpose, some governments
build organizational structures to retain experts.
State-owned enterprises are one possibly effective
instrument because they can offer better salaries
and advancement opportunities.
But for most sectors, most developing
countries—and especially the least developed
ones—cannot rely solely on in-house technical
expertise to negotiate investment contracts.
There is, however, room for broader
capacity building programs. In most cases, they
are likely to be more effective if they aim at
tasks that are broadly useful:
- How to
identify and arrive at clear government
objectives and what negotiation strategy to
pursue, to provide overall guidance to
technical advisors and identify what kind of
technical expertise is required for the actual
negotiations.
- How to
assemble a multidisciplinary negotiation team
that is best suited for a particular project,
with an appropriate mix of local and
international advisors.
- How and
where to obtain outside advice.
- Which
contract clauses and key issues require
special attention during negotiations.
- How to
monitor the implementation of contracts.
Fortunately, when developing countries need
specialized technical skills that are not
available in house, they—like investors—have the
option of seeking world-class international
support for negotiations. Such support is available
free of charge to developing country governments
from a number of organizations.
In sum, there is room for programs to build
capacity for investment contract negotiations, but
those that focus on technical capacity fail to
accomplish much under most conditions. Similarly,
one should not expect that an organization that
provides technical assistance would be effective
in mounting teaching programs. However, advisors
should be charged with encouraging as much
“learning-by-doing” as possible while they are
assisting in negotiations.
Donors should recognize these limits and,
therefore, fund organizations that provide direct
negotiations support and focus on capacity
building of the kind described above. Together,
these kinds of support can improve the outcomes of
investment contract negotiations.
*Karl
P. Sauvant ([log in to unmask])
is Senior Fellow, Columbia Center on
Sustainable Investment, Columbia Law School;
Vanessa Tsang ([log in to unmask])
is a paralegal at Omnia Strategy LLP; Louis
Wells ([log in to unmask])
is Herbert F. Johnson Professor of
International Management, Emeritus, Harvard
Business School. The authors wish to thank
Boris Dolgonos for his helpful feedback on
an earlier draft of this Perspective
and S. K. B. Asante, Jorge Chamot and Natty
Davis for their helpful peer reviews.
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