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Investment disputes involving water

...extracted from a longer piece of Forum collaborative research 

Best Practices in Water Utility Regulation
National regulation of water utilities has included:

  • Due diligence and good faith by those who would provide public utility infrastructure and services;
  • The duty of efficiency, with efficiency gains being passed on to consumers;
  • Duties of information and disclosure, backed with penalties for misrepresentation
  • Utilities cannot charge for property that is not usable and used;
  • Property has to be properly assessed/valued;
  • Operational expenses should reflect market values and be reasonable
  • There are limits to debt financing
  • Rates and profits have to be reasonable and fair
  • Purveyors have a right to make a reasonable profit, but actual profits are not guaranteed
  • Services are subjected to quality requirements, including environmental impacts
  • Transfer pricing (to avoid taxes) is controlled
  • Tariffs and rates may vary with the economy; both economic crisis and excess profits justify specific, time-based regulation
  • Governments can force access to essential facilities
  • Governments may, under specific conditions, require structural arrangements to promote and enhance economies of scale and scope.

 

For governments everywhere, the essential tasks come down to regulating monopolies (where they exist), preventing abuse of dominant market position, and preventing negative externalities like environment and social costs.

Such an exercise of state power is globally accepted, not only in relation to public utility services, but also in connection with resources such as water. 

Decisions resulting from international arbitration processes have the potential to affect the well being of millions of people.  Argentina alone faces almost $20 billion dollars in arbitration claims.  The United States has faced a single claim on water and public health--Methanex--that was close to a billion dollars.

The Problems of IIAs and water

Restrictions on National Sovereign Authority
Contracts signed with international investors for the provision of privatized water services come under the protection of international investment agreements. Therefore, conflicts involving privatization contracts are adjudicated under the procedural and substantive rules of investment agreements.  Regulatory power is now challenged by how international investment tribunals interpret rules of investment protection treaties. 

A number of decisions have seriously impaired governments’ regulatory capabilities. and have caused concerns about a possible regulatory chill,  with negative consequences on public well being.

Argentina alone has been sued in at least 8 different water cases:
1)    Compañía de Aguas del Aconquija S.A. and Vivendi Universal v. Argentina Republic (ICSID Case No. ARB/97/3),
2)    Azurix Corp. v. Argentine Republic (ICSID Case No. ARB/01/12)
3)    Azurix Corp. v. Argentine Republic (ICSID Case No. ARB/03/30)
4)    SAUR International v. Argentine Republic (ICSID Case No. ARB/04/4)
5)    Suez, Sociedad General de Aguas de Barcelona S.A. and Interagua Servicios Integrales de Agua S.A. v. Argentine Republic (ICSID Case No. ARB/03/17)
6)    Suez, Sociedad General de Aguas de Barcelona S.A. and Vivendi Universal S.A v. Argentina Republic (ICSID Case No. ARB/03/19) consolidated with AWG Group plc v. Argentina (UNCITRAL)
7)    Impregilo S.p.A. v. Argentine Republic (ICSID Case No. ARB/07/17)
8)    Urbaser S.A. and Consorcio de Aguas Bilbao Biskaia, Bilbao Biskaia Ur Partzuergoa v. Argentine Republic (ICSID Case No. ARB/07/26)

Tanzania and Bolivia were also taken to international arbitration in water-related cases.

IIAs and water--the key investment rules
Five key protections for foreign investors are relevant to the effects of investment agreements on water-related services and on water management: 

  •   national treatment
  •   most favoured nation (MFN)
  •   minimum international standards of fair and equitable treatment
  •   protection from expropriation without compensation
  •   freedom from the imposition of performance requirements.

These protections are simultaneously rights of foreign investors and obligations of their host States.  They apply to the full life of an investment, not just its initial establishment phase.  It is critical to remember that these rights apply to the full lifespan of the investment, because many water service contracts are decades in length.

NAFTA cases on water and investment. 
Several Other cases of international investment arbitration have questioned environmental regulations. In Tecmed, awarded on 29 May 2003, an arbitration tribunal found that the environmental measures taken by Hermosillo, in Sonora State, in Mexico, were a violation of the expropriation norm of the BIT protecting the investment.  . In the Metalclad case, Mexico was faulted for allowing environmental regulations adopted at the subnational level to interfere with the use of Metalclad's property, which has the effect of depriving the owner of "reasonably-to-be-expected economic benefit of the property."  A NAFTA tribunals ruled this as tantamount to expropriation under article 1110 9 (1) of NAFTA.

In Pope v. Talbott, a NAFTA tribunal found that non discriminatory regulation is covered by the expropriation norm of the agreement (article 1110). In SD Myers v. Canada, the tribunal accepted the argument that regulatory takings could fall within the scope of article 1110. 

These cases show that the  international arbitration system operates under the standard of the sanctity of unfettered property rights. 

But domestic experience and national precedent shows that conditions may change.  Clear corruption and unconscionable terms in a water contract; shifts in public policy; contract inconsistencies and asymmetes; moral hazard--all these are reasons to review contracts.  Not all aspects of property rights may be held sacred.  But international arbitration, as conceived today, does not address these fundamental issues.

Problems with the Dispute Settlement Process

Arbiters Conflicts of Interest.
Arbitration procedures were created as alternative dispute resolution fora operating outside national court systems.  The international investment dispute system is the one legal setting where corporations can act as 'plaintiff' suing a sovereign government.

Critics object to the frequently ad-hoc nature of the setting in which such critical public-policy issues are addressed.  In many procedural ways, this investor-state dispute setting does not reflect the general practice of nation states, and is largely driven by the market incentive of lawyers and investors.  Arbiters can act as lawyers in some cases and arbitrate other cases, with opportunities and incentives to decide cases with a view to create precedent in the ones they act as lawyers.

The procedures are initiated only by investors, and there is no appeal mechanism.

Arbitrators/panel members focus primarily through the lens of the protection of investor rights. 

This new “Global Constitutionalism” has the potential to profoundly alter domestic constitutional balances.  It's added a new dimension to traditional concerns about government intervention. 

A special regime has been created.  It favours  foreign investors over national citizens, and investment over social and environmental values. The system is based on the expansive interpretation of a limited set of  investors protection principles that are given a higher priority than public policy demands in host countries.


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