The sovereign client.

• Author: Buchheit, Lee C.
• Position: Transcending National Boundaries

Sovereign states routinely hire outside (often foreign) advisers on matters of great significance and sensitivity, such as privatization programs, external debt management activities, foreign public relations campaigns and so forth. In the eyes of some observers, this behavior is tantamount to the relinquishing of a sovereign function that ought properly be performed by a government for the government. To others, it is a perfectly sensible response to a sophisticated international marketplace in which sovereign states are treated just like any other commercial actor. Unless the sovereign cultivates the necessary professional expertise among its own officials, or hires it as needed from outside consultants, the sovereign may find itself at a serious disadvantage in its international commercial dealings. This article discusses why sovereign states retain outside advisers, the possible benefits and drawbacks of doing so and the constraints under which such advisers must operate.

Sovereigns as Commercial Actors

Sovereignty is out of fashion. To the extent that the word sovereign connotes complete freedom from external control or constraint, it inappropriately describes states or governments in the last decade of the 20th century. A state's freedom to make war, and the methods by which a war may be prosecuted, are theoretically constrained by various international agreements and principles of public international law.[1] The coercion of other states by non-violent means (sometimes referred to as "economic aggression") may also be inconsistent with norms of international law.[2] Even a state's ability to abuse its own citizens with impunity - long thought to be the last bastion of sovereign prerogative - may in aggravated circumstances give rise to international concern and possibly to intervention.[3] The title of "sovereign state," like that of "Kentucky colonel," should therefore be understood as a flattering misnomer.

The area in which the erosion of sovereign dignity has been most visible is that of international commerce. Until the middle of this century, a sovereign could enter into contracts with foreign counterparties for the sale or purchase of goods or services, or for the borrowing of money, with the comforting knowledge that the counterparties could not enforce those agreements in foreign courts. During this period, most countries recognized an "absolute" theory of sovereign immunity under which sovereigns could not be sued in foreign courts without their consent.[4] Unless the aggrieved counterparty could persuade its own government to apply overt pressure, the counterparty had to content itself with seeking redress through diplomatic means, moral suasion or prayer.[5]

In this century, sovereign participation in international commerce has become commonplace. Indeed, in the state-controlled economies of Eastern Europe and the former Soviet Union, virtually all foreign commerce and finance was conducted in the name of the state. The idea that sovereigns could carry on these essentially private activities under an umbrella of complete immunity from legal process, therefore, gradually lost favor. The alternative was a "restrictive" theory of sovereign immunity, under which foreign sovereigns were denied immunity for commercial activities carried on outside the sovereign's own territory.[6] The United States began to recognize this restrictive approach in 1952, and it was eventually codified in 1976 in the Foreign Sovereign Immunities Act.[7] The United Kingdom adopted similar legislation, the State Immunity Act, in 1978, and most countries now have similar rules.[8]

As a result of these changes, sovereigns can now be held legally accountable for the performance of their commercial contracts with foreign counterparties in the same manner as private parties. If they breach those contracts, judgments may be given against the sovereigns in foreign courts and, subject to certain exceptions, a sovereign's property held abroad may be subject to attachment in order to satisfy such a judgment.[9]

These two factors - the regular appearance of sovereign states (including their agencies and instrumentalities) in international commerce and their ability to be held legally accountable for the performance of commercial contracts - have induced many governments to seek advice from foreign consultants in matters affecting their cross-border trade, financing, investment and external debt management. The advisers may include, among others, investment/merchant bankers, accountants, lawyers, economists, public relations firms, lobbyists, engineers and technical consultants. The projects on which outside consultants may be engaged can involve financial matters (loan agreements, bond issues, privatization programs, asset sales, debt renegotiations and so forth); engineering assistance (such as infrastructure and other construction projects); economic policies; and even legislative/regulatory advice (for example, drafting legislation that regulates domestic securities markets).

Not all governments need to rely on outside advisers to the same extent. Some countries will have large and very sophisticated government departments in charge of activities such as external borrowing (the Kingdom of Sweden comes to mind) or privatization (the United Kingdom is a good example). Less developed countries (LDCs) may not have the same in-house capabilities, and these countries may need to look to outside consultants to fill these gaps. One group of investment bankers, for example, has been described as "an auxiliary civil service on permanent red alert" in recognition of their ability to place a team of trained professionals at the disposal of their LDC clients on short notice.[10] The remainder of this article will discuss principally the role of such outside private-sector advisers to LDC clients.[11]

The Benefits

There are a number of reasons why a sovereign might elect to retain a foreign consultant to assist in the design, negotiation or implementation of a project.

Expertise

Presumably, foreign consultants will be selected principally for their expertise in the relevant area, an expertise built up over time by working on similar projects for other clients in other parts of the world. In many cases, it simply would not be possible for the government's own personnel to replicate this breadth of experience. Government officials will often spend their careers working for a single employer - the government - whereas outside consultants will have...