General Issues Regarding Contracts in the USIJI Process

Newness of the IJI Concept

While the past several decades have seen extensive overseas development assistance projects, joint implementation projects are a new phenomenon; the concept arose out of the Framework Convention on Climate Change in 1992. IJI projects differ from traditional development assistance projects in that IJI projects must meet a detailed set of criteria established by the USIJI Evaluation Panel, and they must either reduce or sequester emissions of greenhouse gases. Because of IJI's newness, there are no precedents from which we can project the greenhouse gas reduction/sequestration outcomes of a given project or the potential obstacles IJI projects may face some years in the future. This means that IJI contracts may be less precise than those associated with traditional international development projects; they should contain language that allows developers some flexibility in responding to evolving international responses to the threat of climate change.

Abstract Quality of the Central Commodity

Another unique feature of the IJI program is that it revolves around what is in essence an abstract good: greenhouse gas reduction or sequestration, the exact value of which the international community has not determined. How does one "sell" something that does not exist or preserve a right to an intangible? The Conference of the Parties in April of 1995 decided that no credit toward meeting national commitments is to be given for GHG reductions until at least the year 2000, making it difficult to assess the future value of carbon offsets. However, near-term benefits may be associated with the reduction that one or more of the participants wish to formalize.

This uncertainty sets the IJI process apart from other international development programs and will require contracting arrangements that account for the "intangible" nature of the central commodity. Project lawyers, accustomed to designing contracts covering tangible assets, will need to learn about the carbon market and develop language that takes into consideration a high level of uncertainty.

Long-Term Nature of the IJI Process

One of the main challenges facing would-be IJI project developers is ensuring project sustainability over long periods of time. Not only do IJI projects need to meet the host country's internal development goals, which are usually long-term, but they must also continue to reduce or sequester greenhouse gases far into the future. Thus, some projects, such as land-use projects, which may involve the planting of entire forests, must be designed to continue for many decades. This raises the issue of how project developers can guarantee sustained operation of the project, including monitoring and verification, and financing, in the climate of uncertainty described above. For example, the RUSAFOR project near Saratoy, Russia, provides for the planting of seedlings on 500 hectares of formerly marginal agricultural land. Because it involves virtually planting an entire forest, this project is expected to last well into the next century.

Long-term concerns over project survival can be heightened even further by the additional risks associated with implementing a project in a developing country. Evolving political, social, and economic environments in developing countries may also provide challenges to the American partner, since some government representatives who today sign an agreement with a U.S. partner may not be in office during the project's implementation. Similarly, a country's legal environment may also change over time. Russia and several countries of Eastern Europe, for instance, are in transition from centrally controlled economies to market economies. Thus, in addition to accounting for time frames far into the future, joint implementation contracts in many cases will also need to operate in environments of political uncertainty.

The Legal Climate of the Host Country

Before initiating a IJI project, partners must understand both the legal and business climate of the host country. There can be differences in expectations between U.S. project developers and their foreign hosts, owing in large part to differences in the legal and commercial environments between the two countries. Indeed, the U.S. legal structure may differ from those found in other countries; similarly, legal terms and definitions may also vary from country to country. U.S. developers of the Plantas Eolicas project in Costa R/ca, for example, observed that the host country partners had a very different style of negotiating contracts, compared to what the U.S. team was accustomed to at home. The Costa R/can decision-making style was much less centralized, involving a large pool of participants; decisions tended to be made at the group level, and the chief negotiator of the Costa R/can team did not have substantial decision-making authority. This manner of doing business lengthened the contracting process and required the U.S. team to make some adjustments in its negotiation style to accommodate the different business culture.

Thus, to avoid misunderstandings, frustration, and the potential for project failure, prospective proposers should learn about the business and legal climate of the host country, and they should learn as much as possible about their foreign partner as well. Useful information on these subjects can be obtained in numerous books and articles found in public and university libraries. Embassies and consulates also provide this information, in most cases free of charge. Most project developers will also want to engage an attorney having experience in international transactions.

Since other countries often have very different legal structures than United States, project developers need to adapt their approaches accordingly. Past participants advise future applicants to retain a good local counsel who is familiar with the legal structure of the host country. Such lawyers can be invaluable resources throughout the project development process. One past project developer even had the host country attorney draft all legal documents and pass them to the U.S. attorney for final comment and review. Using in-country attorneys is often more cost-effective than using U.S, lawyers, since the former have a greater awareness of local circumstances. Engaging a local legal expert may therefore help reduce transaction costs associated with a IJI project. However, one should not rely too heavily on local attorneys, for while they may be excellent contract lawyers, often they do not have extensive experience in the area of project finance. Thus, project developers will clearly also need to have expert U.S. counsel to help protect assets overseas.

Lawyers within the host country can be identified through various means. The best recommendations come through informal referrals from people who have worked directly with them; business associates are often a good source for referrals. Scholars from the target country visiting at local universities may likewise be able to recommend a lawyer back home whose credentials match a developer's needs. Other options would be to contact such organizations as the country's Embassy in Washington, D.C.; the Center for International Environmental Law in Washington, D.C.; the Sierra Club Legal Defense Fund; or the International Energy and Natural Resource Committee of the American Bar Association's International L, aw Division. The Interamerican Bar Association in Washington, D.C. also makes referrals to established lawyers in the countries of North and South America. (see note 1)

In addition to a local attorney, it is extremely helpful to have access to someone in the host country who is familiar with the country's political culture and decision-making system. This person may or may not be the local attorney. The ideal local expert would have contacts in the government and in other organizations and may provide useful suggestions on how to expedite various aspects of the project implementation process. He or she may also be able to provide assistance if things appear to be held up somewhere within the country's government. This expertise is especially valuable in countries where personal contacts and other informal structures are key to getting things done. Through a network of local contacts, for example, the U.S. partners in the RUSAFOR project learned that it was best to initiate the project at the highest levels of government possible, instead of gaining entry at a lower level and working up, since the project would need acceptance by those in the top echelons of the government. Once they became aware of this top-down approach and developed relationships with high-level officials, project developers found that they were able to obtain requisite signatures fairly quickly. Thus, a local advisor can help identify both the formal and informal channels for accomplishing contracting objectives.

Notes

1. The Center for International Law in Washington, D.C. can be reached at (202) 3324840; the Sierra Club Legal Defense Fund's telephone number is (415) 627-6700, and the ABA can be reached at (202) 831-2200. The Interamerican Bar Association number is (202) 393-1217.

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