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Fair Contracts for Poor Countries

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.

Suppose a $500 million petroleum or copper contract needs to be negotiated. This will most likely involve a leading MNE, which can field a negotiating team that includes world-class lawyers, geologists, and financial analysts who understand, for example, the trade-offs between taxes and royalties and can put them in appropriate language. The host country, on the other hand, simply cannot match such a team. Perhaps it does not even know what to ask for.