Foreign investment contracts and sustainable development: The new foundations begin to emerge

Two international projects relating to foreign investment and sustainable development (SD) were completed in the past two months. These two projects individually and together show the emerging pathways to properly considering the linkages between new investments and SD in the host state and community.

The first of these projects to be launched, on 4 April 2011 in Rio de Janeiro, is the International Bar Association Mining Law Committee’s Model Mining Development Agreement (MMDA). The Mining Law Committee began work on the project in April 2009. In October 2009, I and Luke Danielson of the Colorado-based Sustainable Development Strategies Group joined the project at the invitation of the Committee President, Peter Leon, and project coordinator, Bob Bassett. Multiple consultations were held with business, civil society and governments. Several drafts were produced for web-based comments and over 100 comments received. The final document and history is found at www.mmdaproject.org

The second contract-specific project comes from Prof. John Ruggie’s work and the United Nations Special Representative to the Secretary General (UNSRSG) for Business and Human Rights. This is the “Principles for responsible contracts: integrating the management of human rights risks into State-investor contract negotiations: guidance for negotiators”, which was endorsed by the Human Rights Council on 16 June 2011.[1] The project was led by Prof. Ruggie’ legal advisor Andrea Shemberg.

The MMDA takes a broad approach to SD, but from a mining sector perspective.  It essentially asks: what would a mining contract look like if the project’s goal is to contribute equitably to sustainable development in the host community and state while also being a viable business for the investor. The MMDA proposes a new negotiating paradigm, one that replaces a traditional win-lose rents-based approach, with an interest-based approach that seeks solutions for the mutual benefit of the investor, community and government. In comparison, the UN “Principles for responsible contracts” takes a broad approach to integrating human rights considerations, part of any SD paradigm, into contract considerations for all sectors.

Both documents recognize the need for a holistic approach to investor-state contracts. The notion of a social contribution as a voluntary add on to an otherwise business as usual model is rejected in favour of a fully integrated contracting model where social and economic development within the host community are integral components, based on preliminary human rights and social impacts assessments, as well as environmental assessment and management components.

Moreover, both approaches essentially recognize that the anticipated benefits of foreign investment hinge on sound, cogent and coherent policy decisions backed up by well designed laws, regulations and, where used, contracts. In other words, the benefits do not accrue by accident but by design.

But where the UN document stays at a broader level of principles and objectives, the MMDA gets into the details of draft model text. It recognizes, however, that investor-state contracts must be tailored to the unique circumstances of each negotiation, and for this reason, the model agreement provides a range of options for negotiators to choose from. And in many instances, particular legal provisions will already be addressed in domestic law and hence not be subject to contracts all.

A key issue for both processes was that of stabilization provisions. The results appear to be similar in both products. The MMDA deals with the issue in contractual terms and divides itself between fiscal and non-fiscal issues. The “Principles for responsible contracts” paper remains more general, but comes to largely the same place. On fiscal issues, where they are regulated by the contract, a stabilization provision is put in place. For non-fiscal issues, such as environmental standards, human rights-related measures, and health and safety regulations, no stabilization provision is contemplated in the MMDA. Rather, a provision against arbitrary and discriminatory measures is set out, much as in the “Principles for responsible contracts” paper, with an awareness that this should always allow for the raising of such standards to international levels. Both documents directly or implicitly call for investors to ensure the best available technology for the project is used and for ongoing management systems to include an allocation for upgrading technologies as time and opportunity require, ensuring best practices are maintained. Thus, it is recognized that stabilization clauses should not be about rent sharing, but only, when used, about what is truly “necessary” (the term used in the “Principles for responsible contracts”  paper) to protect a business from nefarious actions rather than from foreseeable good business practices.

There is no excuse today—as confirmed in both documents—for investors to use anything less than best available technologies for the location, type of project, etc, or for social and environmental review and management processes not to account for ongoing expenditures as part of the project cost estimates of the investor from the beginning. Nor is there any sound basis for any investor to expect the regulatory environment not to change during the 50 and more years of a project. Stabilization provisions should not be about rent capture, as they largely have been to date. Rather, the full contract should be about designing a framework that is needed to ensure a project is viable and equitable for all stakeholders over the longer term, making stabilization provisions as they have previously been known obsolete.

Finally, both documents recognize the fundamental gap in negotiating capacity that many developing country governments face in investment contract negotiations. This needs addressing through both immediate capacity provision and more developed capacity building. This gap is not only in terms of legal capacity, but also finance, environmental and other. This poses a long-term challenge for many governments and development agencies.

 Author: Howard Mann is the Senior International Law Advisor to IISD. He was a member of the Administrative Committee for the IBA’s MMDA project and the final drafting committee; and a participant in multiple consultation processes related to the development and completion of the Responsible Contracting project. His comments reflect his own views and not those of any other persons or organizations engaged in these projects.