Investment contracts and sustainable development: How to ...

1 Investment contracts and sustainable development : Investment contracts and sustainable development How to make contracts for fairer and more sustainable natural resource investments Economic liberalisation, improved transport and communication systems, and the global demand for energy, minerals and agricultural commodities have fostered natural resource Investment in many lower- and middle-income countries. Increased Investment may create opportunities to improve living standards, but it also creates risks such as environmental damage and loss of key livelihood assets like land, water and grazing. Investment contracts define the terms of an Investment project and the extent to which it advances or undermines sustainable development .

2 Government capacity to negotiate and manage contracts and civil society capacity to scrutinise government dealings can make a real difference to getting a better deal from natural resource Investment . Drawing on test trainings in Ghana and Central Asia and targeting host governments and civil society, this guide discusses how to structure Investment contracts for natural resource projects in ways that maximise the Investment 's contribution to sustainable development . Cotula Natural Resource Issues No. 20. ISBN: 978-1-84369-765-7. ISSN: 1605-1017 Investment contracts and sustainable development How to make contracts for fairer and more sustainable natural resource investments Lorenzo Cotula Investment contracts and sustainable development How to make contracts for fairer and more sustainable natural resource investments Lorenzo Cotula First published by the International Institute for Environment and development (UK).

3 In 2010. Copyright International Institute for Environment and development All rights reserved ISBN: 978-1-84369-765-7 ISSN: 1605-1017. To contact the author, please write to: Lorenzo Cotula, IIED, 4 Hanover Street, Edinburgh EH2 2EN. For a full list of publications please contact: International Institute for Environment and development (IIED). 3 Endsleigh Street, London WC1H 0DD, United Kingdom A catalogue record for this book is available from the British Library Citation: Cotula, L. (2010) Investment contracts and sustainable development : How to make contracts for fairer and more sustainable natural resource investments, Natural Resource Issues No. 20. IIED, London. Design by: Eileen Higgins, email: Cover photo: A balanced deal?

4 Weighing of raw gold in an African gold town argus / Hartmut Schwarzbach / Still Pictures Printed by Park Communications, UK on 100% recycled paper using vegetable oil basked ink. Contents Acronyms iii Acknowledgements iv Executive summary v 1 Introduction 1. Topic and rationale 1. The concept of sustainable development and its implications for Investment contracts 7. Outline 9. 2 Legal frameworks and contracting process 11. A web of contracts within the broader legal framework 11. The contracting process 17. 3 contract models 23. Setting the scene 23. Resource development versus royalties and fees: concessions and leases 24. Sharing produce: production sharing agreements (PSAs) 25.

5 Joint venture agreements 26. contract models in the wider web of contracts 30. 4 Maximising economic benefits for the host country 33. Public revenues 33.. Safeguards concerning the fiscal regime 36. Revenue management 39. Non-fiscal economic benefits: Investment commitments 40. Other non-fiscal economic benefits 43. 5 Maximising economic benefits: local content 45. Concept 45. Structuring local content provisions to maximise local opportunities 47. 6 Managing social and environmental risks 51. Introduction 51. Impact assessments, management plans and applicable standards 52. Safeguards in land takings 56. Social Investment programmes 60. Legal remedies for affected communities 64.

6 7 Stabilisation and renegotiation 67. Stabilisation and renegotiation clauses: what they are and how they work 67. Content and scope 68. Implications for sustainable development 70. Some tips for host government and civil society 71. 8 Dispute settlement 75. contract management and dispute settlement 75. International arbitration in outline 76. Addressing public and third-party interests: the need for balanced expertise 78. and open proceedings Some tips for host government and civil society 82. 9 Transparency 85. The case for transparency 85. Transparency in the contracting process 86. Confidentiality clauses 89. 10 A role-play 91. References 99. List of boxes Box 1. Key concepts 4.

7 Box 2. The web of contracts in a real-life example 12. Box 3. The Richtersveld Pooling Sharing Joint Venture (PSJV) 28. Box 4. Transfer pricing provisions in two contracts from Liberia 38. Box 5. Local content requirements: restrictions from trade and Investment treaties 47. ii Box 6. Good practice in local content provisions 50. Box 7. The concept of risk 52. Box 8. Local consultations in Mozambique 58. Box 9. Examples of clauses 70. Box 10. Extracts from the BTC-Turkey Host Government Agreement of 2000, article 71. Box 11. Limiting the scope of stabilisation clauses: some examples 73. Box 12. Procedural rights under the Aarhus Convention 89. Box 13. Examples of confidentiality clauses 90.

8 List of figures Figure 1. An Investment project parties and stakeholders 11. List of tables Table 1. contracts model compared 31. Table 2. Transparency and non-party submissions in different arbitration fora 80. Acronyms BOT Build, operate and transfer BTC Baku-Tbilisi-Ceyhan pipeline CSO Civil society organisation DCF Discounted cash flow EIA Environmental impact assessment EITI Extractive Industry Transparency Initiative EPA Environmental protection agency EPC Exploration and Production Concession [Mozambique]. ESIA Environmental and social impact assessment FAO Food and Agriculture Organization of the United Nations FOI Freedom of information ICC International Chamber of Commerce (Court of Arbitration).

9 ICSID International Centre for the Settlement of Investment Disputes IFC International Finance Corporation IIED International Institute for Environment and development IISD International Institute for sustainable development HGA Host government agreement IGA Inter-governmental agreement ISO International Organization for Standardization LCIA London Chamber of International Arbitration iii MP Member of parliament NAFTA North American Free Trade Agreement OECD Organisation for Economic Co-operation and development OGEL Oil, gas and energy law PSA Production sharing agreement PSJV Richtersveld Pooling Sharing Joint Venture [South Africa]. RMC Richtersveld Mining Company [South Africa].

10 TRIMS WTO Agreement on Trade-Related Investment Measures UN United Nations UNCITRAL United Nations Commission on International Trade Law VAT Value added tax WAGP West African Gas Pipeline WTO World Trade Organization Acknowledgements This guide was prepared for 'Legal tools for citizen empowerment , a programme steered by the International Institute for Environment and development (IIED). The programme is generously supported, through a framework agreement with IIED, by Danida (Danish International development Agency), DFID (the UK Department for International development ), DGIS (Directorate-General for development Cooperation, the Netherlands), Irish Aid, Norad (Norwegian Agency for development Cooperation), SDC (Swiss Agency for development and Cooperation) and Sida (Swedish International development Agency).