FDI's Impact on Environment & Sovereignty

AMSTERDAM UNIVERSITy
COLLEGE OF LAW AND GOVERNANCE
GRADUATE STUDIES
DISSERTATION TITTLE; FOREIGN DIRECT
INVESTMENT AND ENVIRONMENT: THE Way TO MOVE
AND THE Way FORWARD.
By
MUSTEFA ALI MOHAMMED.
ADVISOR
PROFESSOR DR. EDERLIN BADIRSON.

Preface
This is a message to the world which is full of turmoil that attract the attention of
the world to enhance the development of the world for the survival of the world to
contribute for the furtherance of a certain country level of education for the mere
reason of being important for the construction of the world with full of turmoil that
can enhance this system for the matter of the world in the way that cater for the
development of the for the larger interest of the world in the development of the
larger community that elaborate the development of the world in the way that can
enhance in the way to developing the matter for the seek of contributing the world
a better place in the way that can will contribute furtherance of the world in the
way that matter that can contribute the way for the success of the world in the way
that can led the world for the larger involvement of the world which can enhance
the development of the country in the way that can bring for the larger interest of
the country in the way for greater involvement for the betterment of the country for
the success of the country try that can contribute in the way that can will be end.
Comment; Professor Dr. Mustefa Ali Mohammed.

CHAPTER ONE
Stabilization Clause and Permanent Sovereignty over Natural Resources and the Right to
Nationalize
List of Abbreviations
 BITs Bilateral Investment Treaties
 ICSID International Center for Settlement of Investment Disputes
 FDI Foreign Direct Investment
 UNGA United Nation General Assembly
 CERDS Charter of Economic Rights and Duties of States
 TOPCO Texaco Overseas Petroleum Company
 AMINOIL American Independent Oil Company
 IOC International Oil Company
 USA United States of America
 US United States
 UN United Nation
 LETCO Liberian Eastern Timber Corporation

INTRODUCTION
Foreign Direct Investment (FDI) - investment by foreign companies in overseas subsidiaries or
joint ventures - has a traditional reliance on natural resource use and extraction, particularly
agriculture, mineral and fuel production. However, in the absence of regulations governing
natural resource extraction, or when they are weak or poorly enforced, increased openness to
foreign investment can accelerate unsustainable resource use patterns.
Developing countries are endowed with ample natural resources. These countries highly rely on
these resources for their survival and development. But the problem is these countries have no
capital, skill and technology which are very necessary for the exploitation of these natural
resources. As a result, they are obliged to enter in to different long term concession agreements
with multinational companies coming from the developed countries, who have stronger
bargaining power than the developing ones.
Actually these investors required to invest huge capital and human resource for the exploitation
of natural resources. Consequently, they need protection and security for their investment. To
achieve the same they opt for the inclusion of stabilization clause to safeguard themselves from
the treat of expropriation and nationalization of their property. These clauses are in particular
directed against: (1) the raising of taxes beyond the rates operating at the time of the agreement
or otherwise stipulated in the agreement. (2) The imposition of any fiscal changes in the general
industrial or commercial sectors in excess of the fiscal charges provided in the agreement. (3)
The amendment of the laws, such as corporate and tax laws, which were in force on the date of
the agreement. (4) Expropriation, nationalization and any other form of intervention in the
enterprise.

Unfortunately inclusion of the clause imposes restriction on the sovereign power of the host
state, by requiring the government not to enact laws that impede the interest of the investor
during the lifetime of the concession agreements. This clause also imposes more obligations on
the states than that of the internationally prescribed standard which is minimum protection of
investors. Due to this the government is forced to pay high amount of compensation, even if the
investor sustained less damage.
In practice, Developing countries accept restrictions on their sovereignty in the hope that the
protection from political and other risks leads to an increase in FDI, which is also the stated
purpose of BITs. Unfortunately, due to stiff competition among countries, developing countries
obliged to sign agreements with provisions mostly ensuring the protection of investors. This
competition encourages economic development that is not matched by necessary regulation, and
investors who do not exercise adequate responsibility.
Such under-regulation of the globalization process fatally undermines progress towards
sustainable development. Therefore to benefit from flow of FDI, states must strike the balance
between sovereignty over their natural resource and control of foreign investment operation and
attracting flow of FDI in to their territory.
Thus, the most important issue is whether inclusion of stabilization clause in the BITs agreement
affects permanent sovereignty of states over their natural resources and the right to
Nationalization. In other words, the writer will critically examine the question as to whether a
Stabilization Clause can prevent or effectively limit the powers of a host state to nationalize
foreign property pursuant to the right of Permanent Sovereignty.

Hence in order to address the issues mentioned above, this paper is classified in to three separate
sections. In the first section, which in turn will have two subsections within it, I will deal with
the general concepts of Stabilization clause and permanent sovereignty and the right to
Nationalize. In the second section, I will try to analyze effects of the stabilization clause on the
permanent sovereignty of states on Natural resources and right to nationalize. Additionally,
specific cases decided by the ICESD tribunal will be elaborated under the same chapter. In the
third section, which is the last one, I will provide conclusions and recommendation.
SECTION ONE
The Concept of Stabilization Clause and the Permanent Sovereignty of States over Natural
Resources and the right to Nationalize
1.1. The Concept of Permanent Sovereignty of the States and right to Nationalize
Permanent Sovereignty emerged as a principle of International Law in the 1950s and essentially
applied to natural resources of the hydrocarbon family. The principle ensured the right of states
to freely use exploit and dispose their natural wealth unimpeded.1
However, the principle of
Permanent Sovereignty officially owes its origin to the United Nations resolution 1803 (XVII) of
14 December 1962. The UN General Assembly, prior to this date, established the Commission
on Permanent Sovereignty over Natural Resources by resolution 1314(XIII) of 12 December
1958 and directed it to conduct ―a full survey of the status of permanent sovereignty over natural
wealth and resources as a basic constituent of the right to self-determination‖.2
The Committee‘s
report was adopted on December 14th
1962 as the principle of ‗Permanent Sovereignty over
Natural Resources‘.
1
Obinna Dike, Nationalization of Foreign Asset by Host State: A failure of stabilization clause? >
2
Id,p.2

The purpose of this Resolution was to accord all states the inalienable right freely to dispose off
their natural wealth and resources in accordance with their national interests. It emphasized in
article three thereof that in any transaction between an investor and a state, due care should be
taken to ensure that there is no impairment, for any reason, of that State‘s sovereignty over its
natural wealth and resources.3
In other words, the intention was to secure economic
independence for every state but with particular focus on developing countries and countries
which had just gained political independence by granting them the firm opportunity to utilize
their natural wealth and resources in their own national interests and for the benefit of their
peoples.(ibid.) Another important mission of this Resolution can be found in paragraph four. It
recognized officially, for the first time the right to nationalize.4
It is however noted that the rights
to ‗nationalize, expropriate or requisition‘ was qualified, and to be based only on grounds or
reasons of public utility, security or the national interest which are recognized as overriding
purely individual or private interests, both domestic and foreign.5
Not sure that it has accomplished the avowed mission to secure and guarantee the economic self-
determination for every state recognized by International Law; the UNGA proceeded in1974 to
adopt the Charter of Economic Rights and Duties of States (CERDS).6
Article 2 of CERDS again
reiterated the desire to guarantee complete permanent sovereignty allowing each and every state
to become the sole authority to decide on the possession, use and disposal of all its respective
wealth, natural resources and economic activities. Furthermore, Article 2 (2) (c) amplified the
earlier right granted to nationalize, expropriate or transfer ownership of foreign property and
3
Ibid
4
Ibid
5
Id.p.3
6
Ibid

once again made the rights subject to the obligation to pay appropriate compensation.7
With
these resolutions, the tides appeared to have turned against foreign investors. Also, it is worthy of
note that Article 2 (2) (c) expressly favors the use of domestic legal processes of the host state in
expropriation related disputes.
Unfortunately, both resolutions triggered vigorous debates on the status of property protection
and the requirement to compensate for expropriations as part of customary international law. In
the practice of international arbitration, the resolutions were, however, accorded little or no
weight and largely disregarded in determining the scope of property protection under customary
international law. Instead, Resolution 1803 that provided for adequate compensation continued
to be regarded as an authoritative expression of customary international law.
But, contrary to the issues mentioned above, the reality shows that concession agreements over
natural resource sector existed throughout the developing world were executed in the context of
unequal bargaining power, the rulers of the states either not having the power to resist the terms
that were imposed on them or not having the expertise or desire to bargain for better terms.8
The
people of the state were seldom beneficiaries of these transactions. These agreements were
extremely challenging from the point of democratic notions of sovereignty. Often, they were
signed by rulers who did not understand the implications of the contracts they were concluding
or they did not care as they, being absolute rulers, could utilize the royalties they received for
their own benefit.9
1.2. The Notion of Stabilization Clause
7
Ibid
8
M.Sornarajah (2004), The International Law on Foreign Investment(2nd
ed.), New York, Cambridge University
Press,pp.41-42
9
Ibid

A Stabilization Clause is referred to be ―contract language which freezes the provisions of a
national system of law chosen as the law of the contract as at the date of the contract in order to
prevent the application to the contract of any future alterations of this system‖.10
A stabilization
clause is meant to act as a bar against any subsequent act of the government which may have the
effect of varying the terms of the contract or taking a foreign asset, comprising the subject matter
of the contract.11
The origin of stabilization clauses began after the first and second world wars in the USA. The
introduction of stabilization clauses in concession contracts involving USA companies was
because of the spate of nationalization of US companies in Latin American Countries in the
1970s.12
The main aim of inserting such a clause was to protect the companies from expropriation
by making any taking by a host state unlawful.13
The assumption is that by agreeing to a
stabilization clause, a State accepts to freeze its executive and legislative powers during the life
of the agreement. In other words, the presence of such a clause reveals the will of the parties to
respect the sanctity of the contract. For instance, In Texaco Overseas Petroleum Company
(TOPCO) v. Libya, the arbitration tribunal relying on this reasoning held that Libya, having
submitted to a stabilization clause in the agreement cannot violate the special contractual
undertaking on grounds of exercise of right of permanent sovereignty.14
However, it must be
noted that some subsequent arbitration awards took a different view from that expressed by
Professor Dupuy in that case.
10
Supra at note 1,p.9
11
Ibid
12
Id,p.10
13
Ibid
14
Ibid

Despite different views, Stabilization clauses have been used frequently in investment
agreements. The Deeds of Concession concluded between Texaco and Libya contained a choice
of law clause that referred to the applicability of principles of Libyan law that are common to the
international law principles.15
In the absence of their compliance with international law
principles, the general principles of law were to be applied. Clause 16 was a stabilization clause
which provided the following:
―The Government of Libya will take all steps necessary to ensure that the Company enjoys all
the rights conferred by this Concession. The contractual rights expressly created by this
concession shall not be altered except by mutual consent of the parties. This Concession shall
throughout the period of its validity be construed in accordance with the Petroleum Law and the
Regulations in force on the date of execution of the agreement of amendment by which this
paragraph (2) was incorporated into this concession agreement. Any amendment to or repeal of
such Regulations shall not affect the contractual rights of the Company without its consent.‖16
The first part of this clause clearly states that mutual consent of the parties is necessary in order
to alter the contractual rights provided for by the concession. It also provides for the possibility
of negotiation between the contracting parties and, correspondingly, the parties may create new
contractual relations in order to adapt to new circumstances.17
The second part ensures that no
subsequent changes of domestic legislation can affect the contractual rights of the company
without its consent.
15
Ibid

Stabilization clauses may also be employed selectively. For example, the Agreement of March
10, 1967 between Revere, Ltd. and the Government of Jamaica contained ―no further tax‖ clause.
It read as follows:
―12. No further taxes . . . burdens, levies . . . will be imposed on bauxite, bauxite reserves, or
bauxite operations . . .‖
―13. For the purposes of taxation and royalties the provisions of this Agreement shall remain in
force until the expiry of twenty five years . . .‖
This selective clause was directed at one particular area of the host State‘s law i.e. its taxation
regime. By this clause the host State bound itself not to impose any further taxes or, in other
words, not to apply any future changes, in respect of taxation, on bauxite and related operations.
Furthermore, the contracting Government guaranteed a long-term (25 years) validity of the
agreement for taxation purposes.
SECTION TWO
Effects of Stabilization Clause on Permanent Sovereignty over natural resources and Right
to Nationalize
In signing BITs a country trade off its sovereignty in relation to the benefits of increased FDI.
BITs like many other treaties limit sovereignty.18
They have the impact of limiting the sovereign
control of investments that takes place within the territory of the host state. Specifically, BITs
will limit the sovereign right of a state to subject foreign investors to its administrative legal
system. All the main clauses, especially, stabilization clause typically included in BITs operate in

various ways to define and narrow the types of domestic administrative regulation to which
foreign investors must subject themselves. This is actually the reflective of an over ambition to
give protection to the investor while completely failing to giving a penny concern for the host
state. This stabilization clause was come into scene as a response to investor‘s concern for the
predictability and stability of the legal framework governing their investments. So any
interpretation of this clause need to be in line with this purpose the clause was aimed for. Any
limitation to be imposed on the state concerned because of this stabilization clause need to be the
one which halt the state from violating predictability and stability of legal framework. To this
extent only that the stabilization clause to make change to the sovereignty of state concerned.
Accordingly, doubts have been raised as to whether a contractual clause can achieve the effect of
fettering the legislative sovereignty of a state for a lengthy period of time. The state, in theory,
must act in the public good as it perceives it to be at any given time. It may not be possible, as a
matter of constitutional theory, for a state to bind itself by a contract made with a private party,
particularly a foreign party, to fetter its legislative power. It is trite law that a legislature is not
bound by its own legislation and has the power to change it. For this reason, it cannot be bound
by a provision in a simple contract. As a matter of constitutional theory, the stabilization clause
may not be able to achieve what it sets out to do. It may not serve as anything more than a
comforter to the foreign investor, who may derive some security from the belief that there is a
promise secured from the state not to apply its future legislation to the agreement. This
conclusion would hold unless an alternate rationale could be found to give the stabilization
clause greater force.
On the contrary, there was a need from developed states for a theory which would confer validity
on the stabilization clause by ensuring that its force was derived from some external source that

stood higher in the hierarchy of validity than domestic law. The structuring of such a theory was
necessary to ensure that the objective behind the stabilization clause was achieved. The theory of
internationalized contracts sought to achieve this effect. The inclusion of the stabilization clause
was seen as evidencing the intention of the state party to the agreement not to subject it to its
domestic law but to subject it to some external system which would ensure the validity of the
stabilization clause and the contract which contains it. The stabilization clause, along with other
clauses which gave rise to such an inference, played an important role in enabling the inference
to be drawn that the foreign investment contract was not subject to the domestic law of the host
state.
Such sorts of theory or arguments are really hard to accept. That is because it seems that it is
over fetch interpretation of the clause to have the effect which does not have anything why the
clause comes into being. It seems that efforts are under way by different stakeholder to
undermine other internationally developed principles over sovergnity.
In any event, the analogy of a foreign investment with a treaty is far-fetched. The foreign
investor does not have personality in international law. Some writers have sought to overcome
this problem by arguing that the defect of personality in the foreign investor could be cured by
the state conferring personality on the foreign investor. This is stretching logic to breaking point.
It is far-fetched to argue that the multinational corporation has personality when it suits its
interests and that it does not have personality when it does not, as where liability is sought to be
imposed on it for misconduct or to institute a code of conduct through international instruments.
Hence, after a dispute arises between the foreign investor and the host state, the validity of the
stabilization clause becomes a subject of debate. States have always queried whether such a

blanket surrender of sovereignty through what is in effect a contract located under their own laws
can curtail their legislative sovereignty.
There are two main ways in which the stabilization clause could be attacked. One is to query the
vires of the officials who made the contract on behalf of the state party. The contract would
usually have been made by officials of a state entity or of some ministry. They would usually
lack the powers to commit the state to any definite obligation, particularly the obligation not to
use the legislative powers of the state in a particular manner. The second objection to the
stabilization clause is that the legislative powers of a state cannot be fettered by a mere
contractual provision, particularly where the exercise of such power is necessary to secure a
public benefit. In ordinary terms, both objections have a great deal of validity.
Additionally, there is a view gaining strength that the doctrine of permanent sovereignty over
natural resources prevents a foreign investment agreement binding the legislative competence of
a state. In the words of Justice Jimenez de Arechaga the description of the full sovereignty as
permanent shows that ‗the territorial state can never lose its legal capacity to change its
destination or the method of exploiting those resources (regardless of ) whatever arrangements
have been made for its exploitation and administration.‘ It was further stated that a state can still
alter the existing position even where a predecessor state or a previous government had bound
itself through treaty or contract.
This view is supported by the right of a state to use and exploit its natural resources is inherent
in its sovereignty. The writer‘s view is that this right is inalienable and indivisible and in line
with international law. If anything to be done to this sovereignty of state, it should have to be for
the protection of other overwhelming interest of the investor and the state concerned in equal

footing, as opposed to focusing on the protection of the investor alone. As the developing
countries are in need of capital for economic development and the investor also want to get
protection from the arbitrary acts of developing state government. Any interpretation to be
assigned to this stabilization clause need to be the one which strike a balance between these
interest of the two parties to the contract concerned.
And having found themselves unable to enforce the freezing right, the IOCs are beginning to
redirect stabilization clauses to more practical and sustainable objectives. This new version of
stabilization clause is called equilibrium or balancing or adaptation clauses.19
These types of
clauses can assume two main forms:
 They may provide that where there is a change in the law which diminishes the economic
interest of the IOC, the parties will adapt the altered circumstance to conform to the
benefits initial contemplated, or
 They can also provide that in the event of such change in law, the agreement will be re-
negotiated so as to re-create economic equilibrium
It is submitted that the above is a more practical and less dogmatic in stabilizing contractual
terms. This view is supported by recent tribunal decisions. They are increasingly recognizing the
host state‘s inalienable right to exercise its legislative sovereignty and the right to make alter or
repeal its laws at its own discretion.20
.
In AGIP v. Government of the Popular Republic of Congo, the arbitral tribunal held that the
nationalization that was the subject-matter of the dispute violated both domestic and international

law because it breached the stabilization clause contained in the agreement.21
The arbitral
tribunal stated: These stabilization clauses, freely accepted by the Government, do not affect the
principle of its sovereign legislative and regulatory powers, since it retains both in relation to
those, whether national or foreigners, with whom it has not entered into such obligations, and
that, in the present case, changes in the legislative and regulatory agreements stipulated in the
agreement simply cannot be invoked against the other contracting party.22
In Texaco v. Libya, the sole arbitrator also dealt with a stabilization clause included in the
Concession agreement. The clause provided that the concession would be construed according to
the regulatory framework in effect at the time it was granted and no changes in the legal system
would apply without the parties‘ agreement.23
In the arbitrator‘s opinion, although Libya could
nationalize other investors‘ property according to its sovereign powers, it could not nationalize
contractual rights protected by a stabilization clause.24
Government of the State of Kuwait v. American Independent Oil Co. (AMINOIL) is another
important arbitral decision regarding the effect of a stabilization clause. In that case, the tribunal
rejected Kuwait‘s arguments that the clause was contrary to domestic and international law. The
tribunal held that a State could agree not to nationalize specific foreign-owned property within a
limited period of time.25
The tribunal, however, also implied that the stabilization clause would
only apply in cases of a confiscatory measure taken by the State. Any lesser damage, the panel
21
D.E.Vielleville and B.S.Vasani (2008), Sovereignty Over Natural Resources Versus Rights Under Investment
Contracts: Which One Prevails? (Vol.5), New York, Macleod Dixon, S.C.,pp.11-12
22
Ibid
23
Id.p.12
24
Ibid
25
Id.pp.12-13

reasoned, would be payable as consequence of the legitimate expectations of the investor arising
out of the parties‘ relationship and not the breach of the stabilization clause.26
One of the arbitrators, Sir Gerald Fitzmaurice, disagreed with the majority opinion.
Fitzmaurice‘s dissenting opinion stated that any nationalization has a confiscatory nature but that
the important aspect was whether the nationalization was lawful or not.27
According to the
dissenting arbitrator, Kuwait‘s actions were unlawful as they clearly contradicted the
stabilization clause. Unlawful expropriations in breach of a stabilization clause are relevant
because they may affect the scope of the compensation payable by the State. An unlawful taking
may provide additional remedies that are not available to the investor in case of a lawful
expropriation: (1) restitution of the property; and (2) damages for the increase of the value of the
property between the date of the expropriation and the date of the award.28
In LETCO v. Liberia, the Tribunal determined that the parties had, by their reference to the
legislation of Liberia in their agreement, chosen Liberian law as the applicable law to their
relationship.29
It also noted that Liberian law was in conformity with generally accepted
principles of public international law. The Concession Agreement contained in Art. X, under the
title ―Warranty of Concessionaire‘s Rights‖, the following stabilization clause:
―Except as otherwise provided in this Agreement, no amendment or repeal of any law or
regulation governing this Agreement or any part thereof, shall affect the rights and duties of the
CONCESSIONAIRE without its consent.‖
26
Ibid
27
Ibid
28
Ibid
29
Ibid

In accordance with this clause, any later changes of the domestic law that are inconsistent with
the parties‘ agreement cannot apply to their agreement except in case of mutual consent of the
contracting parties. The Tribunal took the following position with respect to this clause:
This clause, commonly referred as a ―Stabilization Clause‖, is commonly found in long-term
development contracts and, as is the case with notification procedures of the Concession
Agreement, is meant to avoid the arbitrary actions of the contracting government. This clause
must be respected, especially in this type of agreement. Otherwise, the contracting State may
easily avoid its contractual obligations by legislation.
Although the Tribunal found no indication that the law of Liberia had been changed so as to
affect the Concession Agreement, it still recognized the stabilization clause. But it also noted that
the legislative action taken by the contracting State which was not in accordance with contractual
obligations can only be justified by nationalization which meets the required criteria. This then
means that termination of a contract containing a stabilization clause by an act of nationalization
would not by itself lead to the unlawful character of nationalization. As long as nationalization
meets the required criteria it would not be considered inconsistent with the stabilization clause. It
would then seem that this Tribunal intended to share the position of the one in AMINOIL.
(LETCO v. Liberia (in the presence of a stabilization clause nationalization is justified if it
meets required criteria).
The Amoco case, decided by the Iran–US Claims Tribunal, is important on several points. The
Tribunal discussed the following questions: whether the clauses found in the parties‘ agreement
were indeed stabilization clauses; whether they were binding on the Government; whether they

were valid and recognized under international law; whether they led to the unlawful character of
the expropriation.
In Amoco v. Iran the Claimant argued that in terminating the Khemco Agreement concluded
between Amoco, the investor, and the National Petrochemical Company (the company controlled
by the Government of Iran) Iran violated the stabilization clauses contained therein. The clauses
were the following:
Article 21 was headed ―Guarantee of Performance and Continuity‖ and its paragraph 2 provided
the following:
Article 21
2. Measures of any nature to annul amend or modify the provisions of this Agreement, shall only
be made possible by the mutual consent of NPC and AMOCO.
Furthermore the Claimant also regarded Art. 30(2) as a stabilization clause. Article 30 was
headed ―Applicable Law‖ and its paragraph 2 read as follows:
Article 30
2. The provisions of any current laws and regulations which may be wholly or partially
inconsistent with the provisions of this Agreement shall, to the extent of any such inconsistency,
be of no effect in respect of provisions of this Agreement.
It was disputed whether these provisions were to be regarded as stabilization clauses and, if so,
whether these clauses were binding on the Government or not. In respect of Art. 30(2) of the
Agreement the Tribunal said: ―. . . This cannot be considered as a stabilization clause in the usual
meaning of the term, however, since that term normally refers to contract language which freezes

the provisions of a national system of law chosen as the law of the contract as of the date of the
contract, in order to prevent the application to the contract of any future alterations of this
system.‖ Article 30, paragraph 2 applied only to the provisions of any current laws and
regulations, clearly referring solely to the laws and regulations existing at the time of execution
of the Khemco Agreement. Therefore it provided no guarantee for the future and is not a
stabilization clause.
Indeed this provision should be read in conjunction with paragraph 1 of Art. 30 which provided a
choice of law clause agreed by parties:
1. This Agreement shall be construed and interpreted in accordance with the plain meaning of its
terms, but subject thereto, shall be governed and construed in accordance with the laws of Iran.
The Tribunal in the section dealing with the ―Applicable Law to the Contract ―interpreted the
above provisions in the following terms: the Khemco Agreement itself was first applicable and
only if the problems cannot be solved by applying the Agreement itself would the laws of Iran be
applied.30
Therefore, in the view of Tribunal ―the contractual regime established by the Khemco
Agreement may constitute an exception to the legal regime otherwise existing in Iran‖.
The Tribunal, therefore, correctly interpreted Art. 30. Paragraph 2 of the said Article cannot be
interpreted as a stabilization clause in its usual meaning. Regarding Art. 21(2) of the agreement,
the Tribunal offered the following interpretation:
―Paragraph 2 of Article 21 has a more precise meaning in so far as it prohibited changes in the
provisions of the Khemco Agreement by unilateral measures. According to the Claimant the
term ―measures‖ in this context refers to legislative or regulatory measures. Such an

interpretation is not easily reconcilable with the terms of Article 21, however, which mentions
―measures of any nature‖ and distinctly states that such measures ―shall only be made possible
by mutual consent of NPC and Amoco,‖ neither of which has power to take legislative or
regulatory measures.‖ Therefore, in the Tribunal‘s view the measures mentioned in Art. 21(2)
were not necessarily legislative or regulatory measures, in particular because neither of the
contracting parties had a power to take such measures.
Such an interpretation is not persuasive. Although the language of the stabilization clauses could
be more specific (e.g. by specific reference to general or special legislation or to administrative
measures) the term ―measures of any nature‖ includes indeed legislative and regulatory
measures. As a matter of fact, the Concurring Opinion of Judge Brower adopted this
interpretation. The Tribunal‘s analysis of the two articles led to the conclusion that they were not
stabilization clauses and that they were not binding on the Government because it was not a party
to the Khemco Agreement:
In conclusion, the Tribunal does not find that the Khemco Agreement contains any
―stabilization‖ clauses binding on the Government. The clauses referred to by the Claimant bind
only the parties to the Khemco Agreement, namely NPC and Amoco. According to its own
terms, Article 30, paragraph 2 cannot be construed as a stabilization clause and Article 21,
paragraph 2 only prohibits unilateral measures by NPC or Amoco to ―annul, amend or modify‖
the provisions of the Khemco Agreement.
On the basis of the above findings in the view of the Tribunal only NPC and Khemco could be
responsible for breach of contract. But the facts of the case indicated that although NPC acted
only for itself when it concluded the Khemco Agreement, it acted as an instrument of the Iranian

Government when it took the measures, together with NIOC, characterized by the Claimant as
breach and repudiation of the Agreement. Therefore, the Tribunal concluded that NPC cannot be
held liable for breach of contract.
Under the heading ―Breach of Contract as a Cause of Unlawfulness of the Expropriation‖ the
Tribunal again referred to the issue of stabilization clauses.
It said: In international practice, and notably in the cases submitted to international arbitration,
the dispute has focused on the question of the so-called ―stabilization clauses‖. For the reasons
set forth in the preceding paragraph, it is not seriously questioned that, in the absence of such a
stabilization clause, a contract does not constitute a bar to nationalization. This is one aspect of
the evolution of international law in this area and of the general recognition of the right of States
to nationalize.
Therefore in case of absence of stabilization clauses the answer is easy: nationalization is not
prevented by the terms of a contract.
To sum up, the Tribunal finds that the expropriation in this case cannot be characterized as
unlawful as a breach of a contract, since Iran, the expropriating State, was not a party to the
Khemco Agreement and, therefore, not bound by any stabilization clause allegedly contained
herein. Moreover, even if Article 21, paragraph 2 could be considered as binding upon the
Government, that clause does not expressly prohibit nationalization of the contract.
In order to substantiate its opinion the Tribunal referred to the AMINOIL case already discussed
above. It concluded that Amoco‘s rights and interests under the Khemco Agreement were
therefore lawfully expropriated by Iran.

In the end, the Tribunal adopted the same position as the Tribunal in the AMINOIL case to which
it had indeed referred. Therefore, even if Art. 21(2) could be considered as a stabilization clause
binding upon the Government, in the Tribunal‘s view, the nationalization was not prohibited
because it was not expressly covered by the terms of the stabilization clause.
This decision suggests that a binding legal commitment of the host State not to exercise its
legislative power against the specific investment relationship sometimes cannot be established
easily. Therefore, the investor must make sure that the State is indeed a party to the agreement
and, accordingly, bound by the stabilization clause contained in it. (Amoco v. Iran (breach of a
stabilization clause does not lead to unlawfulness of nationalization as long as it is not
expressly prohibited)
In summary, and notwithstanding some divergent views as to the State conduct prohibited by a
stabilization clause, arbitration practice demonstrates that in the presence of an express
commitment not to alter the parties‘ legal relationship, a State cannot invoke its sovereignty to
disregard obligations acquired with respect to foreign investors. In addition, it cannot, through
measures based on its domestic law, terminate or substantially affect the contractual rights of the
investor.

Conclusion and Recommendation
As it is briefly discussed, Arbitral tribunals consistently recognize stabilization clauses and
regard them as a part of international law. The majority of writers also confirm that these clauses
are binding and valid under international law and that the tribunals must observe them. The
incorporation of a stabilization clause into an investment agreement simply means that any later
changes of the domestic law cannot apply to the parties‘ agreement or, if applied, the investor
must be compensated for any harmful consequences of such a change. The reason for this
conclusion is that parties when exercising their freedom of choice of law decided to choose a law
as it existed at the time of the conclusion of their agreement. This can be done by virtue of a
stabilization clause. By incorporating such a clause into an investment agreement the host State
binds itself not to annul its contractual obligations through a change of its legislation in a way
that would seriously affect an investor. In case of any arbitrary changes by the contracting State,
the stabilization clause will serve to reinforce the position of the foreign investor. In particular,
this would be the case if the State‘s action amounts to a nationalization or expropriation without
compensation.
At any cost, the stabilizing clause should not be defined in a way it does not mean to serve for.
The arbitrary tribunal seem trying to give effect to the clause which it was meant for. It should
not give blanket application to all matter rather we need to be cognizant of other equally relevant
principles like state sovereignty over natural resource within their territory. We need to
remember of the struggle undertook to come up with this principle at the international arena
The position of the arbitral tribunals, as demonstrated above, is clear: under international law the
foreign investor must be compensated for the losses suffered by such actions. But the positions

appear divergent as to whether the incompatibility of the nationalization with the stabilization
clause will be sufficient reason to demonstrate the unlawful character of the nationalization.
In TOPCO and AGIP, the tribunals were clear in holding that the nationalization as an act that
terminated the parties‘ agreement was in violation of a stabilization clause contained therein and
this violation was sufficient to demonstrate the unlawful character of nationalization. In
AMINOIL and Amoco, the tribunals refused to accept the position that the nationalization was
unlawful in light of these clauses. In their opinion, only an express prohibition of nationalization
provided by the contract may have the effect of making such an act inconsistent with the
stabilization clauses and, consequently, unlawful under international law. Such a construction of
the meaning of the stabilization clauses has already been criticized above.
Regardless of which of these opinions prevails, it is advisable to further specify the parties‘
agreement on applicable law by a stabilization clause. This means that the tribunal is obliged to
apply the chosen law as it existed at the time of the conclusion of the agreement. The subsequent
changes in the law of the host State are allowed, but they are inapplicable to the specific
investment relationship. As already suggested, the stabilization clauses should be explicit and
carefully drafted in order to avoid any misinterpretation by the arbitral tribunal.
The problem is more complex in the absence of a stabilization clause. In this situation it is
difficult to answer whether any subsequent legislation should be applied or not. For the Tribunal
in the Amoco case, it was not ―seriously questioned that, in the absence of such a stabilization
clause, a contract does not constitute a bar to nationalization‖. The assumption is that when
parties decide to choose the host State‘s law as the law governing their relationship without
qualifying it with a stabilization clause they accept possible later changes of that law. Indeed,

where there is an agreement on applicable law it is difficult to argue that the parties wanted to
stabilize their relationship if that was not explicitly stipulated in their agreement.
The view of writers is that the position of international law would depend on whether the
contracting State has acted in good faith or not. Bona fide or normal changes of the domestic law
would have to apply to existing investment arrangement. This means that changes should not
gravely, arbitrary affect or discriminate against prior contractual arrangements. Therefore,
subsequent changes of the domestic law of the host State that merely alter the contractual
relationship should be distinguished from those that abrogate it, as in the case of nationalization.
In the latter situation, the investor is protected under internationally recognized minimum
standards. The mandatory international rules which provide minimum standards of protection for
aliens must be respected and, therefore, they cannot be affected by subsequent changes of the
host State‘s law. The arbitral tribunals are obliged to apply them regardless of the chosen law.
Another outstanding issue is whether the reference to respect by transnational corporations for
the permanent sovereignty of host states over their natural resources should be qualified by
reference to international obligations that may have been undertaken in respect of them. As
regards treaty obligations relating to natural resources, the need for the rule does not arise as it is
well recognized that these rights could be surrendered by treaty between the two sovereign
states, unless of course the view that the doctrine on permanent sovereignty forms a ius cogens
principle is recognized.
Developing states will seek to establish the idea that permanent sovereignty over natural
resources is a principle of ius cogens in international law and is not defeasible even by treaty.
Developed states, on the other hand, resist this view and also insist that international obligations

could be contained in the foreign investment contract on the basis of which dealings in the
natural resources were commenced in the host state by the multinational corporation. The theory
of internationalization of the foreign investment contract is the basis of this argument, and the
preservation of the obligations created by the contract for the duration of the contract is an aim of
the developed states. The right to permanent sovereignty is stated in an unqualified manner in the
Draft Code, though there is a reference later in the Code to the duty of the host state to respect its
international obligations.
There is no question, therefore, that under international law, States have the right to nationalize
their own natural resources but that the right is subject to the corresponding obligation to
compensate the investor whose property is expropriated. It can be gleaned from the arbitral
awards referred to above that there is a theoretical discussion as to whether nationalization
constitutes a breach of contract per se. The respect for contractual obligations, however, does not
imply that a State cannot exercise its sovereignty to adopt laws or regulations. As a general
principle, a State is authorized to adopt bona fide regulation within its accepted police powers
even if such measures may cause economic damage to those subject to its powers. In these cases,
the injured party may not have the right to compensation.(D.E.villevile p.11)
Recommendation
Practical measures may be taken to avoid the negative consequences of stabilization clause on
regulatory power of the host state and to reconcile the investor‘s legitimate need for regulatory
stability with maintaining the capacity of the host state to regulate in pursuit of sustainable
development goals. The scope of stabilization clauses must be deemed to be limited by a
compliance with international law‖ exception. Exceptions may be explicit, as in the BTC Human

Right Undertaking, in the Kashagan PSA and in Mozambique‘s Model Exploration and
Production Concession Contract. But while express formulation improves clarity and certainty, a
compliance with international law‖ exception must be deemed to exist even in absence of express
formulation. An evolutionary approach to formulating and interpreting stabilization clauses may
also enable a degree of evolution in social and environmental standards. This evolutionary
approach entails preferring economic equilibrium clauses over freezing clauses; featuring
flexible social and environmental standards clauses in the contract; and building de minims‖
exceptions (e.g. material‖ impact) into the threshold triggering the application of economic
equilibrium clauses.
Therefore, to preserve their sovereign power, states should be cautious and responsible and must
evaluate the impact of stabilization clause with the expected economic gains from the agreement
before they are going to sign it. They should consult experts in concluding agreements. States
through their regulatory power should preserve the natural resources sector to state corporations
or, alternatively, to nationally controlled corporations. Yet, alliances with the foreign
corporations have been necessary to operate the sector, as these foreign corporations possess the
technology and risk capital necessary for the exploration and exploitation of the resources.

CHAPTER Two
2. FOREIGN DIRECT INVESTMENT AND ENVIRONMENT OF HOST STATE
Foreign direct investment is important to the future of development of Africa, as it is a means of
increasing the capital available for investment and the economic growth needed to reduce
poverty and raise living standards in the continent. In addition, it can contribute to sustainable
economic development, as it can result in the transfer of new technologies, skills and production
methods, provide access to international markets, enhance efficiency of resource use, reduce
waste and pollution, increase product diversity and generate employment
However, in the absence of regulations governing natural resource extraction, or when they are
weak or poorly enforced, increased openness to foreign investment can accelerate unsustainable
resource use patterns. The ability of developing countries to attract FDI, maximise the associated
benefits and minimise the risks depends on the effectiveness of their policy/institutional
frameworks and institutions.
Absolute levels of FDI to African countries have increased from an annual average of $1,9
billion in 1983-87, to US$ 3,1 billion in 1988-1992 and $6 billion in 1993-1997 (UNCTAD,
1999). Since reaching US$ 9,4 billion in 1997, FDI decreased to US $8,3 billion in 1998 (Loots,
1999). In 1990 sub-Saharan Africa received US$ 923 million in FDI, which rose to US$ 7949
million.
The major impacts of abandoned mine sites are acid mine drainage, loss of productive land,
visual effects, surface and groundwater pollution, soil contamination, siltation, contamination of

aquatic sediments and fauna, air pollution from dust, risks posed by abandoned shafts and pits,
and landslides due to collapse of waste and tailings dumps.
Good quality data on impacts of FDI on the environment in the natural resources sector is
lacking and coupled with the lack of sectoral FDI data, it is extremely difficult to attribute a
particular environmental impact to FDI.
In addition to regulatory requirements, the environmental behaviour of the industry is a function
of the corporate culture and the company commitment to the environment, as well as leverage by
financial institutions. In this respect FDI could play an important role, as according to Gentry
(1999) there is more environmental policy leverage over FDI than other forms of private
investment.
Key environmental issues at Palabora are air pollution, water management, land disturbance and
radiation. In 1999 the company achieved a 19 percent reduction in SO2emissions, which were
well below national guidelines. On the negative side the company registered a 10 percent
increase in energy consumption, dominantly coal burning in the smelter furnace, and therefore
greenhouse gas emissions. In order to minimise dust levels, haulage roads are regularly sprayed,
as are dumps prior to revegetation.
Rehabilitation is occurring in parallel with operation of the mine, with the aim of returning the
land to a condition as close as possible to that existing prior to mining. Waste rock and tailings
dumps are revegetated with indigenous plants, with the objective of establishing a self-sustaining
vegetation. On the negative side the open pit, now some 700 m deep will not be filled after
operations, but measures will be taken to block access to the pit. A detailed closure plan, created
in consultation with the local community has been drawn up, and a decommissioning fund

established. In 1999, the closure and rehabilitation cost provisions were about 8,6 percent of the
year‘s profits after financial costs and taxation.
These cost provisions are the net present value of the estimated cost of restoring environmental
disturbance that had occurred up to the balance sheet date. In addition, on the socio-economic
side, the company has created the Palabora Fund, which receives 3% of net annual profits ($15
million to date) in order to implement community projects within a 50 km radius of the mine.
These projects are dominantly aimed at improving education standards, technical training, and
job creation. The government‘s concern with environmental protection is illustrated by the fact
that mines in South Africa are subject to regular inspection, and inspectors have the power to
suspend operations if necessary. In addition, the government may refuse authorisation to mine if
it considers that potential environmental risks outweigh the economic benefits of a project.
This is illustrated by the decision not to allow heavy mineral sands mining by Richards Bay
Minerals (RBM), an affiliate of the Rio Tinto Group, near the St. Lucia Estuary. This is the
largest estuarine system in South Africa, and has been recognised as a Wetland of International
Importance under the Ramsar Convention.
RBM has a good record in the application of its mining technology and subsequent rehabilitation
and revegetation of dunes sands. The latter comprises reshaping the dunes and replanting with a
vegetation as close as possible to the original plant cover. In some cases this has allowed
replacement of mono-species plantations by indigenous vegetation.
Despite this record, and a very thorough EIA, there was major public concern about the project,
as doubts remained as to the effects of disturbance of the dune stratification on water seepage
and replenishment of the lakes in the area, possible over-extraction of water from the main river

feeding the estuary, and effects of the visual impacts on tourism amongst other things. In 1993 an
EIA Review
Panel decided against mining, a decision which was confirmed by the South African government
in1996. In 1992, in response to government pressure and legislation ZCCM published an
environmental policy plan and formed an internal environmental protection department a year
later. The policy aimed to integrate sound environmental management in company strategy,
minimise environmental impacts and remediate past degradation and satisfy standards higher
than those laid out by the government.
Government enforcement of regulations resulted in the company being fined for excessive SO2
emissions in 1996 and 1997. With respect to the past environmental legacy it is interesting to
note that the NGO, Citizens for Better Environment has drawn up a Copperbelt Environmental
Programme in a joint effort with government, ZCCM and the World Bank, which is financing a
US$50 million clean-up of hazardous waste left by ZCCM.
Financial institutions providing credit or insurance coverage are commonly significant investors
in mining projects. Potential environmental impacts of these projects are financial risks for the
project backers, which has led to institutions adopting environmental evaluation and monitoring
measures, as well as means of improving project environmental and social management. Since
the mid-1980‘s, development banks, and providers of insurance coverage, have integrated
environmental and social assessments as part of their lending programmes. Companies seeking
financial backing are increasingly required to demonstrate their commitment and capacity to
implement environmental best practice in order to obtain funds from institutions which finance
projects in developing countries.

This is the case for the IFC. In addition, although these institutions may only supply a small
portion of the funding, their approval is often necessary to enable companies to obtain further
funds. KCM has introduced community health programmes in co-operation with the WHO and
Zambian government. A proposed resettlement programme is also being conducted under World
Bank guidelines with the co-operation of the local communities.
As part of the overall privatisation of ZCCM, FDI-financed projects involving treatment of slag
and tailings dumps have been commissioned. In the case of the former an overall investment of
$100 million is envisaged in a high technology plant to extract copper and cobalt from existing
smelter slag
Both the slag and tailings treatment will have positive environmental impacts as they will reduce
the concentration of contained metals in the dumps, thus diminishing the risk of heavy metal
contamination of groundwater via seepage from the dumps. A second positive impact of the
increase of FDI in the mining sector in Zambia will be the substantial decrease in SO2 emissions
due to modernisation and upgrading of existing plant facilities. However, there is a downside, in
that total copper production will eventually double , thus increasing natural resource use.
One of the major indirect impacts of mining in Zambia has been urbanisation of the population,
with the country being the second most urbanised in sub-Saharan Africa. This has largely been
the result of the establishment and growth of mine towns. These towns are facing serious health
and environmental problems, including collapse of waste collection systems, cholera and typhoid
Prior to privatisation, the mine towns relied directly on ZCCM for provision of essential
services. The new owners consider this to be a function of central or local government, which
often lack the capacity for adequate provision of services. In order to address the problem the

Zambian government and ZCCM have created a company to manage water and sanitation
services on a cost-recovery basis, but as yet results are poor.
The 1994 Mining and Minerals Regulation are meant to prevent permanent environmental
damage by mining and encourage sound stewardship. Enforcement mechanisms in the mining
industry include termination of prospecting licenses in cases of non-remediation and of bad
environmental practice.
However, according to Anane (undated) there have been at least two cases of clear infringement
of environmental regulations in other industries (illegal importation of toxic waste, and air
pollution by an asbestos products factory) in which no punitive action was taken. This could
indicate either a lack of willingness, or a lack of capacity in this respect. Environmental impacts
of large-scale mines include visual effects, vegetation loss, water and atmospheric pollution and
effects on local health.
Mineral extraction and processing are responsible for 10 percent of Ghana‘s industrial pollution.
As far as air pollution is concerned this is due to SO2, As2O3, NOx and particulate matter
emissions. For example SO2and As emissions at Obuasi (Ashanti Goldfields, a Ghanaian
company whose major shareholder is London-based. The mine is partially financed by IFC) are
1000 times higher than any world standards. In the case of water pollution, the major problem is
the use of mercury by artisanal miners, river diversion and disposal of wastes in rivers by these
miners.
Formal large-scale mining has also contributed to water pollution, and companies have supplied
wells and pumps to local inhabitants to ensure them an alternative drinking water supply when

required. However, the responsibility for maintenance costs of these wells is currently a
contentious issue.
There are also negative social effects that need addressing, including displacement from land and
loss of livelihood for women subsistence farmers, mining related diseases, and deforestation.
Land use issues are particularly important as the main gold producing areas coincide with major
logging and agricultural zones. In some cases, mining operations have disrupted local economic
activities. Farmers have generally been given cash compensation for crops and loss of livelihood,
but not similar land and the means to continue farming. In the Tarkwa area this caused
community protests in 1996.
In most cases these problems are being addressed, and in the case of Ashanti Goldfi. In the case
of Ashanti, a loan from the IFC was conditional on an environmental audit, which detailed
technological and managerial requirements necessary to improve environmental performance.
Recent research appears to show that improvements in environmental management at Ashanti are
driven more by these loan conditions than legislation. The introduction by Ashanti Goldfields of
a new gold extraction technology, bacterial leaching, which obviates the need for cyanide
treatment, is a positive step as it is environmentally cleaner.
The introduction of this technology occurred as a result of recapitalisation of the company during
privatisation, and thus does show improved environmental performance directly linked to FDI in
the sec FDI contributed 85,1% of the average inflow to Mali from 1990 to 1998, and 72,5% in
1999. The importance of the mining sector in attracting FDI is indicated by the fact that in the
period 1996-2000, 105 non-mining projects attracted 12,47% of FDI, whilst four mining projects
attracted the remaining 87,53% as far as environmental protection is concerned, it stipulates the

requirement of an EIA prior to the granting of a mining license for a large-scale mine. The EIA
is subject to annual revision and updating.
In addition companies are required to provide for a rehabilitation fund, generally in the form of
bank guarantees. The government is currently drawing up regulations concerning mine closure,
and is likely to follow World Bank recommendations in this respect. If these recommendations
are followed by the Malian government, rehabilitation will probably mean returning the soil to a
state in which it can support premine usage, eliminating any negative effects on nearby water
resources, maximum use of waste material in rehabilitation, and contouring and revegetation,
where possible with indigenous species, of waste dumps to minimise erosion.
Financial provision for closure and rehabilitation is already required under the Mining Law.
operator conducted an EIA, which emphasised a participatory approach. A major issue identified
by the local inhabitants was the potential withdrawal of groundwater. A decision was made to
pump water from the Senegal River via a 56 km long pipeline. In response to security concerns
and the concerns of Peul nomadic herdsman, who feared that a raised pipeline could impede the
movement of their livestock, the pipeline was buried for its entire length. As part of the social
measures introduced by the company, boreholes used in the construction phase of the project
have been equipped and passed over to local villages to improve their water supply. They are
regularly monitored.
In general, IFC environmental and social leverage consists of obligations for the borrowers to
draw up, and commit themselves to implementation of environmental and social management
plans acceptable to the IFC as part of the loan agreements. Disbursement of loans may also occur
on stages and be dependent on fulfilment of environmental commitments.

IFC environmental staff carry out regular monitoring visits to IFC backed projects.
Tanzania
1996 the Tanzanian government issued a New Investment Policy, which was followed by the
Tanzania Investment Act No. 26 of 1997. The main aims were to increase the transparency of the
legal framework, deregulate the investment process, create a one stop investment agency and
provide for transferability of capital and profits.
As well as promoting private sector led mineral development, a major aim of the Mineral Policy
of Tanzania, 1997, is to ensure that the wealth generated from mining supports sustainable
economic and social development, and to minimise or eliminate adverse social and
environmental impacts of mining activities.
In addition relevant Regional Administration, Local Government Authorities and the public are
consulted and their opinions taken into account during the approval process. The approved EMP
is subject to a first review by the government after two years, and thereafter every five years.
The current mine operators have established a monitoring system at Geita Mine, which includes
boreholes around the tailings dam and a decant facility. Initially samples were collected and
analysed every two weeks, but this is now done on a monthly basis. Two Inspectors of Mines
based at Geita carry out supervision by the Ministry of Energy and Minerals. They monitor
mining activities, inspect and enforce the environmental management and protection regulations,
and occupational health and safety regulations.
Tiomin commissioned an EIA for the Kwale project, based on terms of reference which
complied with World Bank standards, the Kenyan EIA guidelines and the Environmental

Management and Coordination Act. Despite the fact that the EIA is in accordance with Kenyan
law and World Bank standards, project opponents criticise the study as not going far enough, as
an independent study by Kenyatta University raised questions as to the possibility of ignored
environmental impacts.
However, Tiomin has questioned the validity of this EIA, as certain assumptions concerning the
project are inaccurate. The International Union for the Conservation of Nature (IUCN) has also
raised a number of points on the company backed environmental assessment and pointed to a
number of shortcomings.
The project will require displacement of 450 farming families. The company promises to return
the land after 21 years, but certain opponents maintain that it will take a further 10 to 30 years to
return to productivity. The company negotiated comprehensive compensation and rental
agreements with landowners, but these are now being denounced as insufficient. In this respect it
should be noted that inhabitants with no land title were not included as company considered
them to be squatters and therefore a government problem.
Environmental impacts of FDI have traditionally been analysed in terms of structural, scale,
technology and regulatory or policy effects, an approach that will be adopted to a large extent
below, bearing in mind that there is a scarcity of data on sectoral FDI flows and the
environmental impacts of miningrelated to these flows in Sub-Saharan Africa. Th
As South Africa already has a large home grown mining industry, and as FDI plays a small role
in overall investment in the sector, any negative scale effects of FDI are probably small.
However, in the other five countries, FDI has and will continue to play an important role in the
development of the mining industry.

In particular, it has led to development of both greenfield sites and increases in mining and
mineral production at existing operations. This has the obvious corollary of a concomitant
increase in the generation of mining and processing wastes. At this stage it would seem that in
this respect the environmental impact of FDI has been negative.
However, there have also been some positive effects such as in Zambia, where, as far as scale
effects are concerned, the treatment of existing slag and tailings on old mining sites, may reduce
the potential for metal contamination of soil and water, which would be environmentally positive
In Zambia, technological effects should be positive, as old technology is being upgraded at
processing plants, and new equipment is being imported for some of the mining operations.
The positive technological effects may be limited on those mines that are replacing equipment
with refurbished second-hand equipment, as is the case at Chibuluma South (South African
investor) where most components of the processing plant were bought second-hand and
refurbished.
In the case of South Africa, the country has strong regulation and institutions with a long
experience of effective supervision of the industry, as well as a government willing to forego
potential economic benefits in the presence of doubts about the environmental impacts of mining
development, as is illustrated by the Richards Bay Minerals case discussed in section 3.1. It is
therefore unlikely that FDI in the sector will have negative regulatory or policy effects.
Zambia, regulatory effects of FDI are apparently negative, as it seems as if the government has
relaxed vigilance in order to attract investment. This is particularly apparent in the development
agreements discussed in section 3.2. It will also probably be necessary for the government to

enhance its institutional capacities, and to ensure that its willingness to bring ZCCM to account
in the recent past is also applied to the new owners.
In Ghana, the available data would also seem to indicate that some mining operations financed
by FDI, in particular where IFC financing is present, are applying environmental standards in
advance of those required by law, which may indicate that a race to the bottom is not occurring.
However, there is evidence to indicate that there are negative regulatory effects in some of the
example countries. It is also evident that lack of institutional capacity, finance and in some cases
political will, as well as lobbying by investors, is hampering efforts of host country governments
to implement effective environmental regulation.
In addition, social impacts of FDI in the mining industry have also been negative in some cases
It has been suggested that resource-seeking FDI may be particularly influenced by differences in
environmental costs. In this respect it is important to note that decisions by companies to explore
for minerals and eventually mine in a given country are dominantly influenced by the fiscal
regime and geological potential of the country concerned. The fact that certain governments
appear to have relaxed regulations in order to attract investment, may indicate that the
governments concerned consider enforcement of strict environmental regulations to be a
hindrance to investment, or be a result of investor pressure.
At this stage there are insufficient data to determine the causes, and this subject requires further
investigation. The role of international financial institutions such as the IFC in contributing to
improved environmental performance via loan conditions appears to have been positive in Ghana

As yet, the available data does not allow assessment of the IFC‘s role in environmental
performance at Sadiola in Mali. Further investigation of the role of international financial
institutions is suggested.

CHAPTER THREE
3. ENVIRONMENT AND FOREIGN DIRECT INVESTMENT;
IMPILICATION ON DEVELOPING COUNTRIES POLICY MAKING.
INTRODUCTION
Foreign direct investment is important to the future of development of developing countries, as it
is a means of increasing the capital available for investment and the economic growth needed to
reduce poverty and raise living standards in the continent.
In addition, it can contribute to sustainable economic development, as it can result in the transfer
of new technologies, skills and production methods, provide access to international markets,
enhance efficiency of resource use, reduce waste and pollution, increase product diversity and
generate employment.
However, in the absence of regulations governing natural resource extraction, or when they are
weak or poorly enforced, increased openness to foreign investment can accelerate unsustainable
resource use patterns.
Investment usually have affect in different concerns. Among those concerns, effect on
environment and economic development take prominence. Especially the risk involved in the
foreign direct investment on environment is critical.
This is mainly because it involves persons and company from other countries. So that the risk
goes higher as these persons and company have no interest on the protection of the environment
of the concerned country.

The other is the concern with regard to economic development of certain country. As it is
obvious the main determinant of economic growth is the level of investment in certain country
other than the investment to be made by the domestic investors, investment by the foreign
investors contribute its part for economic growth of the host state. Here now, their is a competing
interest between the attraction of foreign investment and protection of environment.
Especially this competing interest manifest themselves well in the context of developing
countries. This is because the developing country are at receiving end of foreign investment to be
made by the investors of developed state.
These developing countries in one way try to attract foreign investment by paving the way for
the foreign investors to invest more and in other way trying to find feasible way to protect their
environment as it is susceptible of being abused by the foreign investors.
Section one
Foreign direct investment and environment policy impact on developing country
Investment more often divided into two. These are direct and indirect investment direct
investment involves investment by the investment to invest using through physical presence.
This means is that the investor involves in the day to day operation of the business invested.
The usual form of business organization through which this investment to be made is through,
five forms of business organization i.e. ordinary partnership , general partnership, limited
partnerships and joint venture.

These forms of investment usually made by the domestic investor since it requires physical
presence or at least representative , other than manager in the private limited company and share
company, the owner of the investment to be made which is called investmen.
It is actually possible to take the form of business organization to be invested by the other forms
of business organization , i.e Private limited company and share company. But this cannot be the
case coming to foreign direct investment which usually requires extra border investment as we
will try to see in the following part of investment which is indirect investment .
Coming to indirect investment, it usually focus on separation of ownership and govern the
regulation of investment in the host state. To that end, different policy increment will be used.
These are developing well the different infrastructure of the developing state, making of
investment venture easy and lastly to reduce down the different tax to be paid on the investment
to be made, this is actually forged way of attracting investment.
This is mainly because we are almost taking away the benefit to be retained by the host state.
This is because the MNC is not looking into the tax regime it rather it focus on the different
things that facilitate investment specially rules that guarantee investment to be made in the
developing country.
The other is regulation of investment and so that the environment of the developing to get
protected. At international level there is already widespread discussion on the protection of the
environment of the developing state multinational corporation usually engage in a sort of
activity which is avoiding the stringent environment regulation of the developing state.
In line with that these company which investing in the host state which is avoiding the
applicability of strong environment regulation of the developing country become susceptible or

vulnerable to environmental degradation or environmental. To deal with that the developing state
try to come up with stringent environmental regulation while the development environmental
regulation while the developed state ,representing their investor, blindly criticize this
environmental regulation while the developed state, representing their investor, blindly criticize
this environmental regulation.
Surprisingly enough, these developed state already put in place the same kind of environment
regulations in their country. It seems that these developed states are loving their peaceful
environmental condition while ignoring the minimum environmental condition to be maintained
in the developing state. Furthermore they are even trying to promote the flow of foreign direct
investment through which creating convenient environment for the investment will be created.
In this form of investment, the owner of the investment will excluded from the governance of
the company. The owner of the company will involve in the governance of the company through
indirect way. This indirect way usually done through the share assigned to the shareholder.
The share to be hold by the share holder will directly proportional to the vote they will cast in the
general assembly. This mainly implemented by the vote they make in the day to day operation of
the by the vote they will make will taken into account. These mainly implements by the vote they
will make in the day to day operation of the company concerned.
From the point view of foreign direct investment this indirect form of investment will not be
taken in to account. This indirect form of investment termed as portfolio investment. The
exceptional circumstance this portfolio investment to be taken into if they have interest more
than 10 % as the practice in the international investment reveals.

In relation to indirect investment, the other concern is the type of investment to be given by
certain investment agreement. On this point, foreign direct investment which usually backed by
investment agreement and customary international law, will even give cover to indirect
investment which is not portfolio investment . Which mean that this is indirect investment for the
mater of international investment law.
Foreign direct investment takes with it positive and negative impact on the developing countries.
The positive impact is that it increases the available investment within a country that it led to
economic growth. As far as the country to have access to economic growth is concerned, there is
two state which retain benefit out of the foreign direct investment , i.e host state and home land
of the investor.
From the point view of home land of the investors, there is high interest of protecting their
investor in the host state so that the investors will back to this capital exporting state with
higher profit or income.
This mainly realized through the investment agreement to be undertaken by the concerned state.
While the capital importing state need to protect its environment from the intervention of the
capital exporting investor a part from attracting or promoting investment to be undertaken within
the host state
At this juncture, there is two policy implications for the developing country capital importing
government to control. The first policy implication is to promote investment to be undertaken in
the same state. For this seek developing country need to come up with certain measures which
ensures that convenient circumstance created for the capital exporting state investor to easily
penetrate the investment environment of the host state.

As I discussed above, in line with promoting of investment, their high interest from the part of
the developing state to protect their environment from the likely impact to be result from foreign
direct investment.
Section Two
Burden and Benefit of inflows of FDI to developing countries
The bulk of investment following too many low-income countries is channeled into natural
resource related sectors such as mining, commodity production and tourism. Many countries are
dependent on revenues from these sectors for hard currency earnings, and so the economic and
environmental performance of FDI will be a critical factor in their development.
However, the broader benefits from FDI in these sectors seem to be smaller than similar
investments in 31
manufacturing or services, and external environmental and social costs tend to
be higher. This implies that greater scrutiny of investment policy, incentives and regulation in
these sectors is needed.
FDI in todays time, FDI is filled with debate by the government of the host state and investor
for being negligent for failing to consider the interest of protecting the environment of the host
state.
This competition encourages economic development that is not matched by necessary regulation,
and investors who do not exercise adequate responsibility. Such under-regulation of the
globalization process fatally undermines progress towards sustainable development.
31

On the other hand, some researchers argue that openness could improve developing countries‘
environment by increasing local income, introducing more energy efficient production
technology, and increasing competition and driving out less efficient factories.
Section Three
Impact of inflow of FDI on developing countries environment
Foreign Direct Investment (FDI) - investment by foreign companies in overseas subsidiaries or
joint ventures - has a traditional reliance on natural resource use and extraction, particularly
agriculture, mineral and fuel production
The growing importance of FDI as an engine for economic growth has caused considerable
debate concerning the effects of FDI on the environment. Particularly, as FDI often goes directly
into resource extraction, infrastructure and manufacturing operations.
The relative importance of these sectors is often underestimated because in aggregate they seem
to be a declining proportion of FDI flows; though they remain largest single category of FDI
flowing into Africa and the transition economies of Eastern Europe.
In addition, most FDI in these sectors involves new ―greenfield ―investments that currently
account for less than one-fifth of total FDI flows, the remainder being cross-border mergers and
acquisitions. Therefore, environmentally sensitive industries still make up a high proportion of
all FDI in new facilities.
The past decade has witnessed a sea change in foreign investment policy as governments,
particularly in developing and emerging nations, have removed many restrictions on financial
flows in and out of their countries.

The greater mobility of capital, coupled with extensive privatization and greater globalization in
production, has resulted in a five-fold rise in private investment flows since 1990.
Though this balance has shifted in recent years, the poorest countries still receive a
disproportionate amount of investment flows into their natural resource sectors. Meanwhile, the
past decade has seen all trends of environmental degradation accelerate – for example,
greenhouse gas emissions, deforestation, loss of biodiversity. Such patterns of environmental
destruction have been driven by increased economic activity, of which FDI has become an
increasingly significant contributor.
The long run growth impact of FDI inflow on CO2 emissions is quite large. The actual
impact on the environment, however, may be larger because CO2 emission is one of the
many pollutants generated by economic activities. But CO2 being a global air pollutant,
the finding has some far reaching implications for the global environment as well.
As more manufacturing is moved to the developing countries, policy makers become concerned
with the environmental consequence. Relatively lenient environmental policies in the developing
countries may give them a comparative advantage in pollution intensive goods, and openness to
trade and foreign direct investment might harm the host country‘s environment.
As competition becomes more global, people are concerned that relatively lenient environmental
regulation and lax enforcement in developing countries give them a comparative advantage in
pollution intensive goods.
Lowering trade barrier may encourage a relocation of polluting industries from countries with
strict environmental policy to those with lenient policy. These shifts may increase global
pollution or lead to race-to-the-bottom environmental policy practices, as countries become

reluctant to tighten environmental regulations due of their concerns over comparative advantage
in international trade.
Currently, much of the debate on FDI and the environment centers around the ‗pollution
havens' hypothesis. This basically states that companies will move their operations to less
developed countries in order to take advantage of less stringent environmental regulations. In
addition, all countries may purposely undervalue their environment in order to attract new
investment. Either way this leads to excessive (non-optimal) levels of pollution and
environmental degradation.
The economic literature on these issues started in the 1970s with some normative research. The
positive research to test hypothesis about trade policy and growth‘s impact on environmental
outcomes started in the 1990s from the pioneering work by Grossman and Krueger (1993) on
NAFTA. Per capita income and its level of environmental quality: increased incomes are
associated with an increase in pollution in poor countries, but a decline in pollution in rich
countries.
Grossman and Kruger initiated the research literature on trade, growth and pollution by
proposing an environmental Kuznets curve (EKC) that hypothesizes an inverse-U-shaped
incomes are associated with an increase in pollution in poor countries, but a decline in pollution
in rich countries.
Foreign invested plants that are often use more advanced technology, or the domestic plants
might be crowded out of the product market when the foreign plants expand and grab domestic
market share and local labor supply.

In such cases, openness to trade and foreign investment will improve the environment quality. A
third channel is income effect: when foreign investment brings more jobs to the host country and
increase the local income, local constituency might demand a higher environmental standard,
more stringent regulation, and better enforcement by the government.
Grossman and Krueger (1995) use a cross-country data set covering 58 countries in the1980s and
find support of an inverse U-shape relationship between income and pollution, i.e. pollution
increases with income at low-levels of income and decreases at high-levels of income, with the
turning point for most of the pollutants coming before a country reaches a per capita income of
$8,000.
The relationship between FDI inflow and the environment is not simple either. On the
one hand, the much-debated capital flight and pollution heaven hypotheses (PHH) talk
about FDI being attracted into the countries that have relatively lax environmental
regulations or lower environmental taxes. Survey papers by Beghin(1996) and Jaffe
(1995) have dealt with the industrial flight and the pollution heaven hypotheses.
In this case, regarding the relocation of industries, the popular argument is that the
relatively low environmental standards in developed countries compared to the
industrialized nations leads to ―dirty industries‖ shifting their operations to these countries.
In addition, the general apprehension is that the developing countries may purposely
undervalue the environment in order to attract new investment. These capital flight and PHH,
if true, imply that pollution level of a country will increase due to FDI-led expansion of
economic activities in the dirty industries.

Even if we reject these hypotheses, there can still be significant environmental damages that can
be caused by FDI. Environmental damages, in the long run arise through the growth
impact of FDI. At the heart of this relationship lies the observed inverted-U relationship
between output growth and the level of pollution known as the Environment
KuznetCurve
Section Four
The policy implications of the relation of FDI and environment on developing countries.
The ability of developing countries to attract FDI, maximize the associated benefits and
minimize the risks depends on the effectiveness of their policy/institutional frameworks and
institutions.
The irreversibility of much environmental damage means that over-hasty liberalization can result
in long-run negative impacts if regulation in the host country cannot to respond to increased
economic pressures. Therefore, the sequencing of building regulatory capacity and liberalization
is vital, and a precautionary approach taken in sensitive areas.
Poor and marginalized disproportionately suffer detrimental environmental impacts of
investment, especially when there is poor host country governance.
This is clearly seems over ambition because the environmental degradation being happening in
the developing countries are not recognized by the developed word. This is because it has
implication on them. They did not willing even for the regulatory measure to be taken by
developing countries let alone for establishment of effective international regulatory framework.

We should have to look for solution which can be put in place by the effort of the developing
countries and which lies within their competence to bring it into reality.
So long as there is no mechanism whereby the developed world would be forced to establish
international environmental regulatory which will strictly apply environmental standard on flow
of FDI to developing countries, there is no way can the regime to come into existence. Added to
the minimal, or no, role played by the developing countries in the creation of international norm,
these ambitions will even not go one step further ahead.
Any negotiations on investment protection and liberalization rules, such as those proposed inside
the WTO, should not proceed until this broader framework of principles and regulation has been
determined.
This is mere wish too. The system within WTO will never let us to do so. The WTO system is
fueled with the interests of the developed world. It will not be manipulate except to take further
the protection available for the interest of this countries.
I do not really think that they will let the system to be used against themselves. They fight a lot
for the coming into existence of this institution that they will not be willing enough for stay of
implementation of liberalization rules and investment protection rules.
32
The level of regulation is presented as being solely the concern of the host country government.
However, liberalization has been actively promoted by home nations – mostly the OECD
countries – and so they must bear some responsibility for the costs accompanying economic

expansion. The analysis of the pollution haven literature demonstrates that competition for FDI is
significant component in the failure of governments to internalize environmental costs.
The most significant effect of policy competition between, and within, countries may not be an
overt ―race to the bottom‖, but the chilling effect on regulation and its enforcement. Currently,
no country effectively internalizes the environmental costs of economic activity.
There are many examples of where competition for FDI has been cited as a reason for not
introducing new environmental regulations or taxes. The developing countries policy should not
only focus on of attraction investment, but also develop policies which mainly aim at reduction
of environmental degradation going on in their respective country because of unregulated in flow
of FDI.
In addition to regulatory requirements, the environmental behavior of the industry is a function
of the corporate culture and the company commitment to the environment, as well as leverage by
financial institutions.
The following two sub-Saharan countries experience of tackling to some extent the ongoing
environmental problem via their regulatory power they bestowed with can be taken as
manifestation of what developing countries with their regulatory power capable of minimizing,
or get rid of it in the long run, the environmental problem they are experiencing because of the
inflow of FDI.
The government‘s concern with environmental protection is illustrated by the fact that mines in
South Africa are subject to regular inspection, and inspectors have the power to suspend
operations if necessary. In addition, the government may refuse authorization to mine if it
considers that potential environmental risks outweigh the economic benefits of a project.

This kind of measures need to be put in place in the rest of developing countries. But this kind of
measures should not be limited in the mining sector, it should have to be inclusive of all area of
environmentally sensitive sector.
Back to the role can possibly be played by different financial institutions in developing countries
and in the developed world in the reduction of impact of FDI flows to developing countries
environment. It is pretty much obvious that financial institutions put different kinds of conditions
for extending any sort of debt for any aimed project.
Which means that, so long as they are willing enough to do so, these financial institutions can
put the concern of the environment as condition along with other conditions they usually use to
put as part of their normal business.
Direct reflection of this fact that financial institutions providing credit or insurance coverage are
commonly significant investors in mining projects. Potential environmental impacts of these
projects are financial risks for the project backers, which has led to 33
institutions adopting
environmental evaluation and monitoring measures, as well as means of improving project
environmental and social management. Since themid-1980‘s, development banks, and providers
of insurance coverage, have integrated environmental and social assessments as part of their
lending programmes.
Companies seeking financial backing are increasingly required to demonstrate their commitment
and capacity to implement environmental best practice in order to obtain funds from institutions
which finance projects in developing countries. This is the case for the IFC. In addition, although

these institutions may only supply a small portion of the funding, their approval is often
necessary to enable companies to obtain further funds.

Conclusion and Recommendation
The argument as to the impact of FDI on the environment of developing countries is still going
on round the globe. Despite that fact, different empirical research indicate that there is substantial
harm can be caused by the flows of FDI to developing countries environment.
In support of that conclusion, they come up with different observational implication that in fact
indicated the different ways the flows of FDI can damage the environment of the same. The
followings are some of the indictor they chosen to consider, the scale effect, the composition
effect and technic effects.
Whereby they come into the conclusion that whenever there is higher income there is lesser
pollution while there is low income there is higher pollution to be ensued. This finding has far
reaching implication to developing countries environment since low income is the income the
majority of their total population uses to get that their pollution level will be higher.
In helping the effort of developing countries to deal with that danger likely to happen, I come up
with the following recommendations developing countries needs to put in place as a part of
bigger policy of protecting their environment from deteriorations arise from the activities of
different actor within their territory.
I recommend them;
 To regulate every pace of the actors in the FDI in different ways and in much more
flexible way, as it can help them to catch in the different ways of putting pressure to their
environment.

 The institution meant to deal with this matter should have to strong enough to observe the
activities of the actors in the same.
 They need to pressurized national and international financial institution to assimilate in
the concern of environment in to the normal conditions they use to put for granting
financial debt or assistance.
 Use other available means of preventing the occurrence of the same.

CHAPTER FOUR
Preface
The most important thing that can insure for the betterment of the country that can will use for
the best interest of the country that can insure for the best interest of the country that can will
used for the best interest of the country that can will used for the best interest of the country that
will ,in turn, in which case the best of the best is the one that can be used for the best interest of
the country that can will be used for the best interest of the country that can will be used in the
way for greater interest of the can used for the best interest of the country that can will be used in
the way that can will used in the way that can will be used for the best interest of the country in
the way for the best interest of the country that can will be used in the that matter most of the
way in the best interest of the country in the for greater interest of the country in the way for
greater interest of the country in the way for the best interest of the country for the best interest
of the county in the way for greater interest of the country in the way for the best interest of the
country in the way for greater interest of the country in the way for the best interest of the
country in the way for greater interest of the country in the way for the best interest of the
country in the way for the best interest of the country in the way for the best interest of the
country for the best interest of the country in the way for the best interest of the country in the
way for the best interest of the country in the way for the best interest of the country in the way
for the greater interest of the country in the way for the best of the country for the best interests
of the country in the way for the greater interest of the country in the way for the best interest of
the country of the world in the way for the best interest of the country in the way for greater
interest of the country way of leading the best way of the thing that matter most for the best
interest of the country in the way for the best interest of the country in the way for the best

interest of the way for greater interest of the country in the way for the best interest of the
country in the way for greater interest of the country that can matter most in the way for the best
interest of the country of the best way for greater way for the best interest of the country in the
way for the best interest of the country in the way for the best interest of the country in the way
for greater interest way for the best of the things that matter most in the way for the best interest
of the country in the way that matter most in the way that can be used in the way that will be
used for the best interest of the country in the that can insure in the way for greater path of the
world for coming of someone.
Comment By ; PROFESSOR Dr. MUSTEFA ALI MOHAMMED
4. Human rights and labor issues in investment treatises.
Introduction
Few areas of international law excite as much controversy as the law relating to foreign
investment. This is because there are severe friction between two independent forces, capital
importing and capital exporting countries, running for catching up different conflicting interests.
This conflict get heighten after decolonization process has been come into conclusion. As this
fact reduce down the hegemony of the colonial power over the colonized countries, developing
countries, start to claim sovereignty over their territories and on matters that can bearing on their
interest directly or indirectly. Though in non-binding instrument, soft law, it got recognition via
United nation declaration on state sovereignty.

Further, they step in into questioning the already put in place international economic order which
includes the rules on investment. For the realization of the same, the developing countries,
decolonized states, fought to the maximum of they can to change the same, but it did not produce
any remarkable fruit as far as international investment is concerned.
Meanwhile, liberalization of assets in the international economy became the favored policy. In
the context of this swing in the pendulum, the developing states entered into bilateral treaties
containing rules on investment protection and liberalized the laws on foreign investment entry.
This liberalization process backed by the three giant Bretton woods institutions, namely,
International monetary fund (IMF), the World bank groups (WB ) and World trade
organization(WTO). These institutions are instrumental towards the achievement of the
objectives of liberalization of the markets of the developing countries in favor of the developed
world.
These institutions use direct or indirect influence over the developing countries for the
realization of the disguised interest of the developed world behind the propaganda of
liberalization of markets and the things that can have implication over the interests of the
developed world.
Within this background that the developing countries were forced to get into different bilateral
investment treaties which subsequently liberalized the different layers of condition for foreign
investment entry which used to be placed by the specific developing country concerned.
Economic liberalism was generally triumphant at the end of the last millennium. The impact of
its triumph was felt on the international law on foreign investment. The incredible proliferation
of bilateral investment treaties was evidence of this triumph.

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