Controversial Contracts: Do Investor-State Agreements Promote Sustainable Development?

Policy-makers and international development organizations have emphasized the importance of foreign direct investment (FDI) in reducing the global gap between wealthy and poor nations. However, the balance of evidence suggests that FDI will only contribute to sustainable development under certain circumstances. Particularly relevant is the regulatory context in which the investment is situated. Despite this acknowledgement, there has been very little research conducted on one of the most important regulatory mechanisms employed in developing countries with respect to foreign investment: the foreign investment contract. Foreign investment contracts, also referred to as ‘host government agreements’ or ‘state contracts’, are agreements made between a foreign investor (often a multinational corporation) and a government or state-owned entity acting on behalf of its government.  Foreign investment contracts govern the relationship between a private actor and a state, imposing rights and obligations on both parties.  In many cases they supplant national regulation and they may affect the implementation of international agreements. This presentation will examine several particularly controversial contracts that govern transnational pipelines, large hydroelectric dams, and exploration and production in the oil, gas and mining sectors.  The presentation will focus on ‘stabilization clauses’, clauses related to liability, and clauses on the environmental and social impact of the investments.  It is argued that the contracts examined are unlikely to promote sustainable development. Given the general lack of public disclosure of foreign investment contracts, it is difficult to determine whether these particular contracts are examples of ‘worst practice’ or are evidence of a more widespread problem.