Till now (refer to above mentioned links), we studied only the advantages of
having a stabilization clause in a PPP contract. However, we must not forget
that a Stabilization Clause works the other way round too. For any investor, Stabilization
Clause and Operational Predictability are two completely different
aspects. There is no doubt that a Stabilization Clause certainly generates some
amount of Operational Stability and Predictability. However, the
states are becoming increasingly conscious about the use of their natural
resources by the private entities. The Clauses relating to fairness and
equity sometimes override the effect of the Stabilization Clause in an
agreement.[1]
The concept of Sustainable Development
and Human Rights also has a role to play in this respect. Stabilization
Clause makes sure that laws relating to environmental norms and work conditions
do not change with time. If an imprudent investors enters into a BIA with a
Stabilization Clause and later on realizes the need to change the environmental
standards or work conditions for increasing the efficiency of the
project, the investor simply cannot do so if a Stabilization Clause is in
place.
Another important issue in this respect is the
use of technology. Governments usually enter into PPP because they do
not have the technical know-how and expertise to carry out a
complex project. Thus the governments expect that the private investors use the
highest level of technology in their projects. Hence, if an investor for the
sake of reducing the costs decides to use older technology without affecting
the efficiency aspect, the stabilization clause would prohibit him/her from
doing so.
The stabilization clause also plays a
substantial part in increasing the paper work of the investor. There are
hundreds of compliance reports that are to be submitted by the investor to the
government.
Sometimes Stabilization Clauses also prevents
alteration in the revenue sharing pattern. Hence, if an investor starts
incurring higher costs due to some reason, he/she is left with no remedy as
there could be no alteration in the revenue share that is to be received.
Stabilization Clause also absolves government
of a lot of responsibilities. It ensures that free hand is provided to the
investor to execute the PPP Project. Hence, extra caution needs to be exercised
by the investor as in such cases as no laxity or slackness is tolerated by the
Host country.
Conclusion
In the present series we understood the meaning
of Stabilization Clause and its utility in a PPP Project. We also appreciated
the darker features of Stabilization Clause and the negative effects that it
could entail upon the implementation and efficiency of the project.
It is the humble opinion of the author that
Stabilization Clause is a double edged sword for the investor. The investor
derives immense utility from the existence of such a clause. However, imprudent
and bad business decisions could lead to a poorly drafted Stabilization Clause
in any agreement. Such a situation clearly needs to be avoided by the investor.
The investor must conduct a thorough risk analysis before asking for insertion
of Stabilization Clause in any BIA.
The wordings of the Stabilization Clause must
be customized depending on the needs and circumstances of each PPP. Same goes
true for the governments as well. The governments should make sure that by
inserting a Stabilization Clause in the agreement, it does not jeopardize its
own interests. Unscrupulous investors surely try to take advantage of the
Stabilization Clause by interpreting the stabilization clause in such a manner
as to ensure maximum profits. The governments must try to create a balance
between the public interest involved and the profit generation incentive of the
investor.
[1] Howard Mann, Stabilization in
Investment Contracts: Rethinking the Context, Reformulating the Result,
Investment Treaty News, October 7, 2011 available at http://www.iisd.org/itn/2011/10/07/stabilization-in-investment-contracts-rethinking-the-context-reformulating-the-result/
No comments:
Post a Comment