Contextualizing Stabilization Clauses

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Due to high sunk costs and the long-term nature of extractive industry investments, stabilization clauses have long been included in contracts to assure investors that the state will not change the contract requirements, in particular the fiscal terms, over the life of the project. Especially in countries that are perceived as politically risky, investors demand long-term, sometimes indefinite, stabilization clauses. While these clauses act as a risk-management tool for investors, they curtail the sovereignty of the state to adapt the terms if/when there is a change in circumstances and act in favor of the public interest. This research aims to assess whether political risk indicators are a good measure to predict fiscal regime changes and distinguish between those that presented an abnormal risk for the business. The results will provide a framework for governments and investors to negotiate the length of stabilization clauses based on selected political risk indicators which best predict fiscal regime changes.