Multi-actor contracts, competing goals and regulation of foreign investment.

• Author: Odumosu-Ayanu, Ibironke T.
• Position: The Impact of International Law on Canadian Law

1. Introduction: The Multi-Actor (Investment) Contracts Opportunity

   "The most important way we improve regulation, according to the responsive approach, is by conceiving of regulatory culture not as a rulebook but as a storybook and helping one another to get better at sharing instructive stories." (1)

   The regulation of foreign direct investment (FDI) is addressed in both domestic and international law. Most of the regulation of FDI occurs in the domestic sphere while the international realm often dictates the scope of impacts that domestic regulatory initiatives may have on foreign investors. Customary international law and investment treaties recognize the ability of states to regulate foreign investment, but discriminatory regulation or regulation that violates international laws on investment protection is proscribed. (2) Interactions between domestic regulation and international protection of foreign investment are relevant to all countries. However, for Third World countries, there is the added question of whether and how foreign investment contributes to economic development. (3) As a result, the relationship between the regulation of foreign investment and economic development, particularly in the Third World context, is an oft-debated issue. (4)

   Beyond the debates about the economic implications of foreign investment regulation, the relationship between foreign investment and other subjects that impact the public-interest generate significant discussion. (5) Presented here is an analysis of the regulation of the sometimes competing aims presented by foreign investors, governments, and local communities in the extractive industries. These aims sometimes overlap, depend on particular contexts, and are difficult to present in profit, economic growth and development, ecological sustainability, and social wellbeing categories. Rather, they ebb and flow; the goals fluctuate based on the particular situation, time, and place of the actors involved. The interests are not static; for example, local communities are not always concerned about environmental integrity. Environmental goals are more often the concern of local communities where pollution impacts the health of these communities, impedes their ability to farm, fish, or earn other livelihood, and generally creates communities that are uninhabitable. (6) Like other actors, some of these communities are also interested in the economic contributions of FDI. But their interests transcend this single focus. Therefore, the focus here on the often competing economic and environmental integrity goals generated by extractive industry projects is presented with an understanding that these goals are not static. (7)

   Management of the risks generated from these competing areas is mainly addressed at the domestic level. Adopting insights from both proponents and critics of responsive regulation as well as scholarship on regulatory contracts, this article draws lessons from Canadian experience with regulation and contracts in extractive industries. (8) These Canadian contracts have different combinations of actors--state-investor, investor-local communities, and sometimes, state-local communities-investor. Ongoing study of these contract formations lend credence to the suggestion that contracts could reduce conflict and foster more amicable relationships between the actors involved in investment projects in extractive industries. (9) However, some of these contract formations are not particularly beneficial to local communities. Using regulatory examples from different parts of the world, including recent initiatives in resource-rich Nigeria, it is suggested here that a multi-actor approach to investment-related contracts in the extractive industries could have (quasi) regulatory implications for managing competing goals.

   The proposed multi-actor approach developing through ongoing research on decision-making in the extractive industry advocates for the adoption of multi-actor (investment) agreements. These are contracts among foreign investors who are involved in project development, local communities that host or are impacted by particular investment projects, and the host Government(s). (10) This article is part of a series that investigates the potential contributions of a robust contract framework for addressing some of the challenges that the relationship between local communities, foreign investors, and governments present. (11) The multi-actor contract framework is imagined as a framework that only involves these three actors because these actors are immediately and often most directly impacted by the effects of foreign investment projects in the extractive industries. It is a tripartite framework that directly incorporates the interests and perspectives of these actors. However, the framework recognizes the need to regulate in the broader public interest, hence the involvement of the Government that sits at the negotiating table on the public's behalf.

   Host governments have immense legal and regulatory capacity and power to determine the legal and economic structures of the projects, and indeed, of the entire jurisdiction that they govern. They also have the responsibility to ensure that the broader public interest is captured in whichever contractual and/or regulatory tools they adopt. Investors provide significant amounts of capital and expertise, and they physically implement projects in local communities. These investors are in constant, close contact with the host and impacted local communities. For their part, the local communities are inhabitants of the territories in which projects are implemented. Even though the entire country could potentially benefit from these projects, host and impacted communities directly bear the consequences of these projects, whether positive or negative. Their real property and other legal rights are implicated in engaging with investors and governments with regards to extractive industry projects. These communities have moral entitlements as well as economic interests that are directly impacted by extractive industry projects. (12)

   The proposed multi-actor approach finds support in some contract approaches to regulation. (13) However, it transcends these existing perspectives. Rather than purport to be primarily a regulatory tool, it is argued here that multi-actor contracts could serve quasi-regulatory functions by providing support for regulatory initiatives. This support could, nevertheless, be determinative of the regulatory choices that governments make. The contracts would actively include affected communities that would act as parties having privity to ensure that both the government and investors fulfill their terms of the contracts. To the extent that these contracts include concrete obligations for the state and investors, they would serve a quasi-regulatory role. (14)

   The present article does not fully articulate the scope, contributions and challenges of the multi-actor approach. The scope of the approach, the specific questions that need to be addressed and the need for further research have been explored in other work. (15) Here, the focus is on the (quasi) regulatory scope of the approach. There are several reasons that compel adoption of this contract approach which has potential quasi-regulatory capacities. Foreign investment law has typically focused on states and foreign investors without directing much specific attention to affected local communities. Local community interests are addressed in other areas such as environmental law and human rights law, which while important, may not necessarily address all of a community's concerns. Evidently, there is a need to question the emphasis placed on this state/investor-centric approach to foreign investment. In addition, states sometimes fail to adequately represent their constituents due to lack of capacity, lack of interest, and even conflict of interest in some cases. As a result, international law sometimes extends standing to non-state actors, including to investors in the international law on foreign investment and to individuals in human rights law.

   Given the inherent limitations in states' regulation, direct local community participation has the potential to foster robust decision-making and enhance regulatory initiatives. Recognition of the contributions of local community participation partly accounts for the conclusion of Community Development Agreements (CDAs) between investors and local communities in many parts of the world, and the conclusion of agreements between Governments and local communities. (16) For example, the Government of British Columbia has concluded Economic and Community Development Agreements with some indigenous nations in the Province of British Columbia. (17) References here to CDAs and other existing contract forms do not necessarily suggest an endorsement of these agreement forms, their contents, or their processes. As discussed in Part D, they are only addressed here as examples of existing agreements that incorporate local communities. While many of the investor-local community CDAs and even the British Columbia Economic and Community Development Agreements are mostly revenue-related agreements, the proposed multi-actor agreements are conceived of as more robust agreements that could make some regulatory contributions, especially with regard to balancing competing regulatory goals.

   Investment in the extractive industries typically involves competing goals. For example, the goal of obtaining economic benefit from foreign investment must be balanced with the goal of minimizing the negative environmental impacts of investment projects. As argued here, there is sometimes a focus on the economic benefits of projects to the detriment of other factors such as the (immediate) impacts of environmental degradation on local communities. More direct participation of local communities presents an opportunity to...