Columbia FDI Perspectives

Perspectives on topical foreign direct investment issues

The Columbia FDI Perspectives are a forum for public debate. The views expressed by the
authors do not reflect the opinions of CCSI or our partners and supporters.

No. 359 June 12, 2023

Developing countries must negotiate the best possible investment contracts with foreign investors
at the outset. Contracts determine the obligations of host countries and investors and the
distribution of benefits between them for years to come.

Contracts for mining and infrastructure can be highly complex, involving specialized technical
agreements. Their subjects range from the division of revenue to financing, pricing, construction,
operating obligations, environmental commitments, and responsibilities at eventual closure.
Developing countries rarely have the expertise in all these fields to match that available to
international investors.

The results of negotiations are, therefore, often sub-optimal for host countries. At one time, initial
contracts could relatively easily be renegotiated. Today, the availability of investor-state dispute
settlement (international arbitration) makes it difficult to change contracts once they are concluded,
hence the importance of getting deals right at the outset.

Donor organizations regularly push for “capacity building” to create technical expertise for
negotiations within host country governments. That expertise can cover financial analysis, industry
knowledge, engineering and geological evaluation, environmental analysis, legal expertise,
regulatory skills, and more. But building and maintaining technical expertise within a
government is a time-intensive and costly undertaking, and it often fails.

Does it make sense to try to build all these technical skills within a government? Experience
suggests caution:

Electronic copy available at: https://ssrn.com/abstract=4474456

• Retaining the skills is often difficult. Better salaries in the private sector, at home and
abroad, attract trained professionals away from government. Although many officials may
not be moved by better offers, loss of skilled personnel to the private sector or international
institutions is frequent.

• Even those who remain in government are, in many cases, rotated away from the positions
in which their skills are needed.

• Deep expertise is built from experience over many years. Keeping expertise up-to-date
requires regular engagement in practice, but frequent use is often uncommon in
government.

• Even when countries have sectoral ministries (e.g., ministries of mines or infrastructure)
and state-owned technical agencies that possess some of the needed technical expertise,
tensions between government entities may make it difficult to draw on them for
negotiations.

• Few “capacity building” attempts actually build much capacity. To be effective, they are
best organized and supervised by specialized entities that can create pedagogically sensible
syllabuses, call on materials developed for teaching purposes and bring instructors who
encourage exchanges among participants. Simply organizing a chain of presentations by
experts is not likely to be effective. An hour or even a day of lecture on building financial
models cannot make an official capable of constructing useful models. At best, it can
convey a sense of skills that are lacking.

• Investors do not attempt to develop all expertise they need in-house. They bring in outside
legal experts for mergers and acquisitions and international arbitrations, and they hire
engineering consulting firms for designing or valuing projects. If the skills are needed only
infrequently, they are best hired from outside.

Of course, building certain technical expertise internally may be worthwhile for governments that
negotiate particular types of investment contracts regularly. For this purpose, some governments
build organizational structures to retain experts. State-owned enterprises are one possibly effective
instrument because they can offer better salaries and advancement opportunities.

But for most sectors, most developing countries—and especially the least developed ones—cannot
rely solely on in-house technical expertise to negotiate investment contracts.

Electronic copy available at: https://ssrn.com/abstract=4474456

• How to identify and arrive at clear government objectives and what negotiation strategy to
pursue, to provide overall guidance to technical advisors and identify what kind of
technical expertise is required for the actual negotiations.

• How to assemble a multidisciplinary negotiation team that is best suited for a particular
project, with an appropriate mix of local and international advisors.

• How and where to obtain outside advice.

• Which contract clauses and key issues require special attention during negotiations.

• How to monitor the implementation of contracts.

Fortunately, when developing countries need specialized technical skills that are not available in
house, they—like investors—have the option of seeking world-class international support for
negotiations. Such support is available free of charge to developing country governments from a
number of organizations.

In sum, there is room for programs to build capacity for investment contract negotiations, but those
that focus on technical capacity fail to accomplish much under most conditions. Similarly, one
should not expect that an organization that provides technical assistance would be effective in
mounting teaching programs. However, advisors should be charged with encouraging as much
“learning-by-doing” as possible while they are assisting in negotiations.

Donors should recognize these limits and, therefore, fund organizations that provide direct
negotiations support and focus on capacity building of the kind described above. Together, these
kinds of support can improve the outcomes of investment contract negotiations.

*
Karl P. Sauvant (karlsauvant@gmail.com) is Senior Fellow, Columbia Center on Sustainable Investment, Columbia
Law School; Vanessa Tsang (vanessa.tsang@columbia.edu) is a paralegal at Omnia Strategy LLP; Louis Wells
(lwells@hbs.harvard.edu) is Herbert F. Johnson Professor of International Management, Emeritus, Harvard Business
School. The authors wish to thank Boris Dolgonos for his helpful feedback on an earlier draft of this Perspective and
S. K. B. Asante, Jorge Chamot and Natty Davis for their helpful peer reviews.

The material in this Perspective may be reprinted if accompanied by the following acknowledgment: “Karl P. Sauvant,
Vanessa S. W. Tsang and Louis T. Wells, ‘The limits of capacity building for investment contract negotiations,’
Columbia FDI Perspectives, No. 359, June 12, 2023. Reprinted with permission from the Columbia Center on
Sustainable Investment (http://ccsi.columbia.edu).” A copy should kindly be sent to the Columbia Center on
Sustainable Investment at ccsi@law.columbia.edu.

For further information, including information regarding submission to the Perspectives, please contact: Columbia

Electronic copy available at: https://ssrn.com/abstract=4474456

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and discussion of sustainable international investment. Our mission is to develop and disseminate practical approaches
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more information, visit us at http://ccsi.columbia.edu.

Most recent Columbia FDI Perspectives

• No. 358, Lu Wang and Wenhua Shan, “Mind the force majeure clauses in investment contracts,” Columbia FDI
Perspectives, May 29, 2023
• No. 357, Isabella Cannatà and Riccardo Loschi, “Settlement of investor-state disputes: can states avoid
arbitration?” Columbia FDI Perspectives, May 15, 2023
• No. 356, Keer Huang, “Subsidies as a regulatory object: from trade subsidies to outward FDI subsidies,”
Columbia FDI Perspectives, May 1, 2023
• No. 355, Fabrizio Opertti and Christian Volpe Martincus, “Investment promotion in the new international context:
what is the next frontier and how to get there,” Columbia FDI Perspectives, April 17, 2023
• No. 354, Martin Wermelinger, “What can governments do to boost FDI for sustainable development?” Columbia
FDI Perspectives, April 3, 2023

All previous FDI Perspectives are available at https://ccsi.columbia.edu/content/columbia-fdi-perspectives.

Electronic copy available at: https://ssrn.com/abstract=4474456