Today, states do not agree to avoid laws and rules against the provisions of the treaty, since the treaty is concluded by the executive, while laws are promulgated by the legislature independently of the executive. Instead, the treaty`s stabilization clause is used in its second sense, according to which governments accept that if conflict rules are adopted that affect the economic terms of the contract, the government will compensate the other party`s damages in the same amount. A clause in a contract between an investor and a host State that addresses legislative changes in the host State during the life of the project. There are three broad categories of stabilization clauses: a stabilization policy aims to limit unpredictable fluctuations in the total output of the economy, as measured by the country`s gross domestic product (GDP), and to control peaks in inflation or deflation. Stabilizing these factors generally leads to a healthy level of employment. Whatever the initial intent, it is clear that the emphasis on expansive stabilization provisions as a “necessary” element for an investment-friendly environment led to a breadth and depth of these clauses that went beyond what would support a sound investment policy. There are now efforts to reclassify the notion of stabilization in the sense of predictability and protection against arbitrary government actions. This provides a much more limited interference with the right of states to regulate in the public interest, while maintaining useful protection for investors when needed. Above all, it also removes the stabilization of rent-seeking behavior that has characterized negotiations on investment contracts in a broader sense. This will be an important element of a general move towards more balanced treaties between host States and investors.
Stabilization policy is a strategy implemented by a government or its central bank that aims to maintain healthy economic growth and minimal price changes. Maintaining a stabilization policy requires monitoring the business cycle and adjusting fiscal and monetary policy as necessary to control sudden changes in supply or demand. [5] Howse, Robert, “Freezing government policy: Stabilization clauses in investment contracts,” Investment Treaty News, April 4, 2011, www.iisd.org/itn/2011/04/04/freezing-government-policy-stabilization-clauses-in-investment-contracts-2/ That leaves the issue of arbitrary treatment. Here, specific language can and has been designed around arbitrary or arbitrary and discriminatory treatment. The International Bar Association`s Model Mining Development Agreement and Professor Ruggie`s Responsible Procurement Process recommend similar approaches. [10] The focus is on returning the stabilization provisions to the original intent for significant political risks: protecting the investor from arbitrary, discriminatory or bad faith measures by the government; in other words, harmful behaviour on the part of the government instead of legitimate actions in the public interest. Stabilization provisions and operational predictability for an investor are not the same thing. Although the stabilization clauses were designed to create operational stability and thus predictability, this was not the result. Contract reviews and renegotiations take place on an ongoing basis. Resource nationalism developed rather than shrunk during the period of its increased use. The concepts of fairness and justice have gained momentum in their wake and now outweigh the legal value of clauses expected by companies in most political contexts. In other words, if investors or their lawyers can get a stabilization provision, they will, because it increases the profit margin.
In the language of economic news, a stabilization policy aims to prevent the economy from being excessively “overheated” or “slowed down”. The term stabilization policy is also used to describe government measures in response to an economic crisis or shock such as a sovereign debt default or stock market crash. Responses may include immediate action and reform laws. Similarly, it is clearly not in the interest of promoting sustainable development and improving human rights to prevent a Government from addressing important issues of social and economic development or environmental sustainability. But the analysis of why the focus should be on stabilization clauses towards operational predictability takes us much further than such generalities. The purpose of a stabilisation clause is to provide investors – and their lenders – with some assurance that the investment will not be subject to unpredictable and costly legislative changes – for example, in terms of the level of taxation applicable to a project. However, they can also have a negative impact on the host country, for example by reducing its ability to maintain its flexibility in the face of changing economic and political circumstances. Stabilisation clauses should therefore be narrow and limited in scope and duration, in particular as regards the main sources of revenue such as fees, taxes, fees and high charges.
Stabilisation clauses should also not freeze environmental, labour or similar rules. In a previous ITN article, Professor Robert Howse suggested that empirical analyses show that such provisions are largely rent-seeking behavior of investors. [5] After reviewing several economic studies that conclude that, from an economic perspective, government compensation for the impact of regulatory changes on costs is not effective, Howse notes: “If we start from the standard position that compensation for regulatory changes is not effective, then our preliminary conceptualization of a stabilization clause will be that it gives the company an advantage or rent-ready. Over the past two decades, stabilization provisions in investment treaties (and national legislation in some developing countries) have become a popular demand from investors in developing countries. Rarely used and largely unconstitutional in most developed countries[1], these provisions essentially limit the ability of governments to apply new laws and regulations to a foreign investor who is the beneficiary of such a provision. The original rationale for the stabilization provisions, it seems, was to use legal mechanisms to address political instability, particularly in developing countries. This was also seen as a prerequisite for certain funding situations. Their migration should be seen as a standard feature of a “welcoming” investment environment, and the scope and extended timelines of many of these clauses (Shemberg states in his article in this ITN volume a 100-year operating period for such a clause) raise several doubts about their real purpose.
A 2009 report by the International Council on Mining and Metals and the Commonwealth Secretariat questions whether the legal and political stability that these provisions were supposed to create can now be truly undermined by these provisions. [3] One argument in this sense is that such clauses appear to guarantee illegitimate and often unfair agreements for mining companies […].