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The resource nationalism cycle, stabilization clauses and the need for flexibility in concession agreements

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posted on 23.01.2015, 11:21 by Patrick K. M. S. Ng’ambi
Foreign direct investment in the mining and oil industries is invariably fostered through the signing of concession agreements between the host State and the investor. Such concessions may contain fiscal incentives, to encourage the flow of FDI. However, such concessions are also susceptible to alteration by the host State, once the investment has been sunk. This may include increasing taxes or outright nationalization. To avert this, investors will often insist on the insertion of stabilization clauses. These clauses constitute an undertaking on the part of the host State, that they will not take any administrative or legislative action that would adversely affect the rights of the investor. Such clauses are well recognized by arbitral tribunals and the unilateral abrogation of these clauses, will have pecuniary consequences. Not only will the host State have to pay damnum emergens but also lucrum cessans as part of the compensation package to the investor. Such a position promotes efficiency as per the efficient breach theory, by discouraging the State from terminating concession agreements unless they will make some money, even after compensating the investor for lost future profits. However, this ultimately renders stabilization clauses inflexible because they preclude the host State from pursuing legitimate public functions. Such a position, necessitates some form of contractual flexibility. However, the legitimate expectations of the investor also ought to the protected. The means of achieving this balance is by the inserting renegotiation clauses in the concession agreements.



Vargiu, Paolo; du Bois, Franҫois

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School of Law

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University of Leicester

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