Introduction

Imagine an investment project in the extractive sector, such as an oil pipeline, during the construction phase. Assume as well that the investors, usually a consortium of companies, have opted for project finance (PF) and have made available considerable amounts of money for the overall project, including exploration and construction, that will later produce a revenue stream coming from oil, gas or minerals being marketed. Until the extraction begins, the investors run a heightened commercial risk: they have advanced their money, but cannot yet begin to recover return. Furthermore, they know that lenders most probably have, albeit limited, recourse to the sponsors’ assets to service the loans, until the revenue phase begins. Sponsors therefore anxiously await the flow of crude oil or the start of mining, fearing any prior surge in costs, including those due to unexpected measures to protect human rights or the environment. Time is money, especially when investment costs have yet to be recovered. In that sense, projects that are quickly implemented tend to heighten the risk of worker accidents, death threats for community members resisting economic activity, spills and damages to the environment and irreversible health damages (see also Chapter 5 by Sheldon Leader). At the same time, the host state, in this situation, may be eager to create or maintain its reputation for an investor-friendly environment, and be more lenient on the implementation of social standards.