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Contracting Human Rights? Ruggie Teams with IFC on Study

Empirical research conducted by John Ruggie and the International Finance Corporation examines if foreign investment contract clauses enable human rights violations.

By Bill Baue | September 27, 2007

SocialFunds.com — A clarion call of concern over the often-dangerous crossroads between business and human rights has been sounding of late, most prominently trumpeted by Harvard Professor John Ruggie as Special Representative to the UN Secretary-General on Human Rights and Business. His April 2005 mandate calls for mapping potholes in the road where business adversely impacts human rights and proposing solutions to fill them. He and his colleagues—dubbed Team Ruggie—are focusing attention on concrete practices where business and human rights intersect.

Last month, Team Ruggie announced a collaborative study with the International Finance Corporation (IFC), the private sector arm of the World Bank, to examine just such a juncture: so-called stabilization clauses in contracts between host governments and project finance investors. These obscure mechanisms—which seek to reduce investment risks by freezing laws that apply to investors or compensating them for the costs of complying with new laws—carry significant implications for human rights.

The concern: When governments strengthen domestic human rights regulations, often to comply with international law, do these clauses exempt companies from compliance or governments from enforcement obligations? What is happening in practice on the ground?

To answer these questions empirically, Team Ruggie added human rights lawyer Andrea Shemberg in June to work with Motoko Aizawa, head of the policy and standards unit of IFC's environment and social development department. Shemberg wrote a 2003 report for Amnesty International spotlighting human rights implications of the Baku-Tbilisi-Ceyhan (BTC) pipeline that prompted BP to amend its contract and perform a Human Rights Undertaking that altered the legal terms and human rights implications of BTC's stabilization clause.

The IFC-Ruggie partnership, which activists may question, grew organically, according to Aizawa. She told SocialFunds.com that Ruggie's initial research and IFC's revision of its performance standards on social and environmental sustainability (which she spearheaded) followed parallel paths and transpired concurrently.

"Our initiatives intersected, and I observed at a couple of consultation sessions that John organized, the stabilization clauses kept on coming up," said Aizawa. "NGOs have said that these clauses actually create human rights violations because they tie the hands of governments, which are responsible under various international agreements to improve their domestic human rights legislation, and companies may be inadvertently helping governments not perform their obligations."

"We recognize that the debate has been ongoing, but I have not seen any research out there that really analyzes what happens on the ground," she added, underscoring the need for this empirical study.

Shemberg thinks "it is absolutely fundamental that IFC is involved because they operate at this intersection advising clients on social and environmental issues, so if this research discovers potential risks of negative impacts on human rights performance of the state, IFC may be part of forging solutions." The IFC connection also gives Shemberg access to the dealmakers—businesspeople, lawyers, and politicians that IFC interacts with regularly on project finance deals—that NGOs or academic researchers might not be able to access.

One of the key questions Shemberg is asking is why stabilization clauses exist in the first place. Broadly speaking, the clauses minimize the financial risk of investors losing money—but in doing so, they may increase the reputational risk of companies being perceived as violating human rights. Stepping back, however, a common sense perspective gives pause.

"In principle, these clauses butt right up against what human rights law says states have to do," said Shemberg. "From a human rights lawyers' perspective, a contract that on the face of it says a new law can't apply is seemingly posed in opposition to the state's international legal duty to regulate."

Human rights activists who are versed on stabilization clauses agree.

"UNCITRAL—the United Nations Commission on International Trade Law, the inter-governmental body that makes recommendations on investment rules—makes the rather obvious point that corporations, like citizens, should expect changes in the law: indeed, such change is part and parcel of democracy," say Nick Hilyard of The Corner House in the UK and Antonio Tricarico of the Campaign to Reform the World Bank in Italy. "Stabilization clauses should therefore be limited in their scope, only covering 'specific legislative changes that target the particular project, a class of similar projects or privately financed infrastructure projects in general,' according to UNCITRAL, or changes in economic circumstances that could not reasonably have been foreseen at the time of the contract being signed."

Hilyard, who wrote a book chapter on stabilization clauses, and Tricarico point out that the Organization for Economic Cooperation and Development (OECD) similarly recommends such specificity in stabilization clauses. They also raise concern about the lack of transparency of project finance contracts.

"If investment is to be for the public good, it is critical that the public has the opportunity to shape the terms of the investment—contract transparency is thus essential," Hilyard and Tricarico told SocialFunds.com. "Our experience with the Host Government Agreements for the BTC project in Azerbaijan revealed that even sovereign Parliaments sometimes were not fully informed of the clauses in the agreement, ratifying it under pressure, even though it gave a blank check to companies."

The study, which is still in early stages and is slated for release in early 2008, does not encompass the problem of transparency within its scope, though Team Ruggie and IFC will hold consultations with NGOs later in the process that may raise this concern. In addition to identifying whether and to what degree stabilization clauses negatively impact human rights, the study will advance recommendations for solving these problems.

"You can change the way contracts are written to avoid negative human rights impacts if they exist," said Shemberg, though she notes that stabilization clauses are only a very small component of the much broader picture of business and human rights. "We're not going to resolve all human rights problems by fixing contractual language."

"That said, I can't imagine a better context than a UN mandate in which to undertake this research because of the potential to discuss, identify, and implement solutions," she concluded.

© 2007 SocialFunds.com. Republished with kind permission.

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