Fair Contracts for Poor Countries

Poor countries and multinational companies can avoid the costs of renegotiating contracts that future governments perceive as unfair if companies pay countries to hire world-class negotiating teams. After all, companies want not only the best possible deal for themselves, but also the certainty of durable contracts.

A number of countries in Latin America, Africa, Eastern Europe, and elsewhere are abrogating or renegotiating contracts with multinational enterprises (MNEs), and others are likely to follow suit. The costs can be high. Governments may get better terms, but they may also become embroiled in international investment disputes and discourage other investors. For companies, renegotiations mean uncertainty and possible interruptions of production and revenue.

Significant shifts in power (typically as a result of changes in commodity prices) and ideology, or changes in the economics of projects, can lead to renegotiations, especially when it comes to large investments in natural resources and infrastructure. But often the reason is that the host country considers a contract to be unfair.

While “fairness” may well be in the eyes of the beholder, in some cases, the host country may not have had the expertise required to negotiate the best possible deal – a frequent situation when MNEs negotiate with the least developed countries (the world’s 50 poorest countries, most of them in sub-Saharan Africa). Mittal’s 2005 deal with Liberia (renegotiated last year) and various contracts with Congo probably fall at least partly into this category, as do some deals in ex-Soviet countries.

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