Negotiating changes in investment treaties

Negotiating the right kind of international investment treaties has always been a complex task for countries with insufficient capacity. Building State capacity is critical to achieve that balance. However, repeatedly, States are taken to international arbitration - some could have been avoided by craftier language or anicipating changes in economic conditions.

Karl Sauvant and Louis T Wells bring out the complexity in anticipating changes in economic conditions while negotiating international investment treaties. Stability clauses that bind the State to a particular position without providing avenues for legislative change could restrict States from initiating reasonable reform. They stress on the importance of taking into account changes that may occur due to windfall profits or due to the need to amend existing regulations.

One lesson for governments is clear: mistakes, vague terms and failures to account for future conditions and concerns can no longer easily be corrected later. Governments must get contracts right from the beginning. Resource contracts need mechanisms to cover the prospects of future windfalls: progressive royalties or income taxes, or production-sharing formulas that adjust government take. They also need working provisions, so investors lose mining rights for failure to meet deadlines for production and target production rates. Agreements should anticipate potential problems with transfer pricing, debt financing, etc. The scope and duration of any stability clauses must be limited, anticipating that taxes and environmental and social concerns might be subjects of future legislation. Ideally, contract terms should be subject to occasional review.

The ability to anticipate changes and incorporate suitable language in treaties to address unforeseen trajectories is a question of State capacity and intent. It also ensures treaties that are balanced. For this State capacity needs to be built - by involving multisectoral experts, legal expertise and administrative, public sector experts. That is easier said than done!