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| Expropriation notice for construction by the Grand Central Railroad Company of France |
In the previous posts (Part I, Part II and Part III), we understood the concept of Stabilization Clause, Public Private Partnerships (PPP) and their relevance in the context of International Investment Law. In the present post, the author shall argue in favour of the diminishing utility of Expropriation Clause in the context of PPPs.
In the case discussed in the last post, we saw
that a lucid Expropriation Framework requires a clarity in identifying the
parameters relating to Indirect Expropriation as well. If Indirect Expropriation
is not adequately defined and addressed in any agreement, it would negatively
affect the interest of the investors and the host country will be able to take
the shelter of indirect expropriation in order to refrain itself from
compensating the investor for its sovereign actions.
A PPP is nothing but a contract between a
public authority and a private party. These projects are the ones that involve
substantial amounts of risks and expertise and hence the government invites
private players to enter into a partnership and help the government to execute
or carry on the public service projects. The government has to be quite careful
in such projects as many times, implementing a PPP can evoke images of giving
away natural resources and public resources to the private companies for their
own vested interest.
Such doubts usually arise when the PPP project
is not being implemented properly. The governments come under immense political
pressure from all corners of the society. Hence, in such cases, the government
in order to absolve itself from all the responsibilities shifts most of the
blame on the private companies and invokes provisions like Expropriation
Clause to take immediate control of the project in order to save its face
in the public. The sufferers are the private investors and the public exchequer.[1]
A well-defined PPP framework in relation to
expropriation is clearly the need of the hour. The utility and acceptability of
Expropriation Clause is slowly but steadily decreasing. Today, we have
transnational companies and some of these companies are bigger than the
economies of a lot of countries. The bargaining power of these TNCs is immense.
However, by invoking expropriation clause or in the garb of Sovereign State
Action, the developing countries and the LDCs have time and again jeopardized
the interests of the foreign investors.
An interesting solution to this problem could
be by limiting the risk factors associated with the PPP. This risk
mitigation has to be carried on by the Host State before entering into an
agreement with the foreign private investors. This is very important as the aim
of any PPP is to further the public cause. Profit Generation can never be the
sole motive of a PPP. In the present post, I propose that inclusion of a
Stabilization Clause in a BIT or an Agreement could significantly mitigate the
risks for the foreign private investor as well as the government.
Stabilization Clause and PPPs
Governments enter into PPP in order to harness
the expertise and skill of the private players. This ensures that the public
projects are efficient and are performing to their fullest capacity. We must
not forget that general public is also a stakeholder in PPPs because they are
the ultimate beneficiaries of such partnerships. Thus, in the light of this
fact, it becomes more important that the PPPs be stable both legally and
foundationally. This double-fold stability can be provided by inserting a
Stabilization Clause in the BITs or BIAs.[2]
Stabilization Clause is a not new phenomenon.
It has been resorted to previously by many countries. However, its application
in the context of PPPs could be a novel one.
Advantages
There are certain apparent advantages of having
a Stabilization Clause in a PPP such as:
1. Important stipulations such as performance
requirements cannot be changed at the whims and fancies of the government.
2. The predictability and certainty
in the execution of the contract will increase.
3. Host Countries cannot unilaterally terminate
the agreement at their own sweet will.
4. Existence of a Stabilization Clause will
strengthen the claim of the investor and will also ensure certainty in
awarding of damages.
5. During adjudication, Stabilization Clause
will positively play a key role in computing the damages that are to be
awarded.
6. The likelihood of higher damages will
certainly increase.
7. Due to all the above mentioned advantages,
the host countries will hesitate in terminating the PPP contracts. The
countries will try to make sure that small obstacles do not lead to a deadlock.
8. Lot of developing countries are politically
instable. Existence of a Stabilization Clause in the agreement will hedge the
private investor from the risk of arbitrary interpretation of the PPP
agreement by the subsequent governments.
9. As mentioned above, PPPs are high risk
projects. Existence of Stabilization Clause will make sure that the private
investors get reasonable and justified time to execute the project. Many times,
small obstacles lead to deadlock and unnecessary consumption of precious time
of the private investor takes place which ultimately leads to failure in the
implementation of the project.
10. The
extent to which the existing laws could be changed is usually specified in a
well-drafted Stabilization Clause. Thus Stabilization Clause will also
provide a solid framework for carrying out the negotiations in case of any
conflict of interests. The rules of the game will be defined and private
investor will not be at a disadvantage during such negotiations as the
existence of a Stabilization Clause will make sure that the countries do not
change their laws unilaterally or without notice.
However, if an investor has made a poor choice
or a poor business judgment, it cannot rely on the Stabilization Clause to
recover its costs or the lost profits. The existence of the Stabilization
Clause will only make sure that the investor does not have to bear a
disproportionate and unreasonable burden of the effects that culminate from the
exercise of the sovereign power of the State.
In the next post, we shall talk about the
negative sides of having a stabilization clause in PPP contracts.
4. Expropriation Clause, Stabilization Clause and Public-Private Partnership
5. The Darker Side of Stabilization Clause in Investment Agreements
5. The Darker Side of Stabilization Clause in Investment Agreements
[1] Virginia
Tan, Advocates for International Development, Public-Priavate Parterships
available at http://a4id.org/sites/default/files/files/%5BA4ID%5D%20Public-Private%20Partnership.pdf
[2]
Asha Kaushal, Revisiting History: How the Past Matters for the Present
Backlash Against the Foreign Investment Regime, 50 Harv. Int'l L.J. 491,
513 (2009).
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