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Legal Stability Contracts Part II: Evaluating The Stability Contract Regime

July 25, 2009

The problem is clear enough: attracting foreign direct investment, particularly medium and long term capital and infrastructure investment, is more difficult in environments that do not have a long-term history of stability that diminishes real and perceived national risk, political risk, and regulatory risk, among others. Firms are justifiably concerned about sinking substantial capital into an environment in which there is or has been a  history or manipulation or distortion of tax, labor, safety, environmental, property, financial institution, corporate, tax, and import/export regimes, among others.

 An innovative solution seems attractive enough: provide for a means of creating a public-private contract protecting specific investments from adverse changes in specific laws.

But is the Colombian regime of legal stability contracts fulfilling its promise?  What factors must be critically evaluated in considering their effectiveness? This post identifies several factors to consider, that will be explored in future posts, and invites your suggestions as to other factors to consider.

In my first post on legal stability contracts, we presented the then-current list of the Stability Contracts identified on the Commerce Ministry’s website. That list of 28 companies has not increased since earlier this year.  The list of companies, as I said, consists of sophisticated, often multi-national concerns whose names are well-known and desirable.

This only raises questions like “who chooses stability contracts?” and “who does not?”  For example, a large number of the Colombian firms in which the International Finance Corporation (IFC) has invested are not among those who have sought legal stability of their investments.

And, among those firms who are making use of the regime, what do these investors try to protect with stability contracts? Even among those IFC-financed firms which have signed a stability contract, there are other investment projects not covered.  And what about infrastructure projects, like the Ruta del Sol three-phase concession and construction project or the Mountain Highways in Antioquia?  How would legal stability contracts help, or or they too costly, or ineffective, or just unnecessary?

One thing is pretty clear, the contracts are almost uniformly used for protection on the tax side.  Most of the legal provisions stabilized, by far, are in the Estatuto Tributario, or tax statute, or closely-related provisions on tax and tarriffs.

In examining these contracts, additional issues arise, including: 

  • Inequity issues for firms that do not sign stability contracts
  • The premium cost, its reasonableness in relation to the protection provided, its scalability (or lack thereof), and structuring its payment.
  • The legal regimes that may not be stabilized
  • Drafting problems that favor the government
  • Enforcement problems

Readers are invited to post a comment or submit ideas about other factors to be considered in evaluating stability contracts.

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