Catalysing financial-sector development in The Gambia through sound legal framework : a compelling case for a twin-peaks model

Abstract

Host countries particularly developing countries do not usually have financial capacity needed to explore, exploit and develop projects involving natural resources extraction. More often than not, they do not even have the technology needed for the proper execution of such complicated ventures. As a result, they would want a private partner to take up the risks and challenges associated with natural resources extraction. Host countries especially developing countries compete among themselves for foreign investors. Accordingly, they would enact competitive investments codes with very generous incentives to attract foreign investors. The investment codes would include but not limited to incentives such as tax stability clauses, tax holidays, expatriation of funds, compensation for expropriation, zero import duties and many more. Foreign investors would do their own viability studies by comparing investment codes for different countries before they settle for one particular country. At this point, they are in the stronger negotiating position than Host countries who are desperate and in a hurry for foreign investors to develop the mining, gas or petroleum sector. Thus, they would demand for more incentives and investment guarantees to safeguard their investment. At this stage, foreign investors would demand the inclusion of stabilisation clauses in concessions in order to tie the legislative hands of the host country from enacting laws or regulations that have the potential of varying the terms agreed by the contracting parties. By so doing, the concession is insulated from subsequent changes in the law or regulation thereby making the law applicable to be the law or policies that existed at the entry of contract. In this way, any new laws or regulations passed by the host country during the life period of the concession, will not apply to the contract. Host states find the insertion of stabilisation clauses in long-term concessions as an infringement of their permanent sovereignty over natural resources. They argue that stabilisation clauses take away their sovereign prerogatives hence they are invalid since states have permanent sovereignty over their natural resources. Foreign investors, on the other hand, argue that the mere fact that states agree to the insertion of stability clauses in concessions, that in itself is an exercise of sovereignty and willingness to be bound by the terms in that concession. They insist that Host state are bound to perform their concessional obligations and not unilaterally change its laws or regulations inconsistent with the concession. They, therefore, insist on the principle of sanctity of contract (pacta sunt servanda). There is therefore, a constant conflict between the concept of pacta sunt servanda and permanent sovereignty over natural resources regarding the insertion of stability clauses. It must be noted that breaching a stabilisation clause results in the breaching party compensating the affected party. Compensation is usually monetary. These clauses are very rigid and do not offer any solutions to changes in circumstances that may render performance of contract onerous. There is therefore need for a flexible and amendable approach to long-term concessions. This may be achievable through insertion of renegotiation and adaptation clauses. The flexibility of long-term concessions is an advantage to both a foreign investor and Host country for mitigating the effect of an unanticipated event which undesirably affects the feasibility of the concession. Nevertheless, the principle of sanctity of contract has frequently prompted rigid provisions with the fundamental justification that this gives investors security and predictability of contract. On the other hand, by virtue of the principle of vital change of circumstances, novel drift has come to life in the arena of extractive industries including the insertion in the concession a clause which provides for renegotiation or adaptation of the existing concession. The aim of the flexible mechanism is that contracting parties should not be indebted to carry on a performance which would be unfairly onerous or unproductive due to a supervening unfettered event. For these mechanisms to be effective, contracting parties must define clearly the trigger events. Not any event must prompt a renegotiation of the provisions of the concession otherwise that might lead to contractual instability. Suffice to mention that renegotiation of the provisions of concession can happen even in the absence of an express provision to that effect. Parties in an agreement that does not expressly provide for a renegotiation clause, may resort to look at other provisions of the concession such as law applicable, force majeure and hardship clauses as a starting point.