chapter  14
Contractual assurances of fiscal stability
Pages 20

Introduction Mining and petroleum agreements governing the exploration and development of natural resources frequently include contractual assurances of stability. These stability clauses are intended as legally binding commitments by the host country’s government. The commitment may be for an initial period of years or for the length of the agreement. They may cover a broad-range of host country laws or be limited to fiscal laws or even certain provisions in the fiscal laws, such as tax and royalty rates. This chapter primarily addresses contractual assurances of fiscal stability.1 “Fiscal stability” here means stability and predictability in the taxation, production-sharing, pricing, or state participation rules that govern the division of proceeds from a resource project.2 Fiscal stability clauses are generally justified by: (1) the large size and the sunken nature of the initial investment, and (2) often a long period required to recover investment and earn a reasonable return, taken together with (3) a lack of credibility on behalf of the host country to abstain from changing the fiscal rules – possibly singling out high rent petroleum or mining operations – once the investment is sunk (the “time inconsistency problem”). It can be argued that the need for a fiscal stability clause is less compelling under certain conditions: a history of sound fiscal management, statutory and effective corporate tax rates in line with international rates, low tariff rates and non-imposition of taxes that distort investment and production decisions (e.g. asset taxes, excises on machinery), non-discrimination between domestic and foreign investors, a low level of corruption, a transparent tax policy process, and a reasonably efficient tax administration. Adaptability and progressivity in the fiscal regime may also serve as an alternative. There may also be other forms of intervention that reduce risk to investors (subsidies, infrastructure provision, perhaps even state equity shares). Fiscal stability clauses are more common in mining and petroleum agreements negotiated by developing or transition countries than in those negotiated by developed countries. Some developing countries with a significant petroleum sector, including Angola and Nigeria, and most developed countries, including Norway and the United Kingdom, do not grant fiscal stability clauses in their petroleum agreements.3