The Rise of Disputes in Cross-Border Water Services

The Faculty of Law of Chinese University of Hong Kong organised an international conference in late March 2015, on the topic of “Managing the Globalisation of Sanitation Water Services: ‘Blue Gold’ Regulatory and Economic Challenges”. This has been an important event devoted to the globalisation of sanitation and water services, which gave participants a platform to exchange ideas, discover novel legal issues and broaden their knowledge.

Globalisation of Water Privatisation

The world of water services changed significantly in the late 1990s due to an extraordinary boom in global population growth. The sustained population increase sparked a need for water services expansion. Opportunities for investment in water services and sanitation infrastructure attracted tremendous support from myriad international financial institutions. These institutions unlocked a host of new business opportunities for the water services and sanitation industry to address traditional problems ranging from fresh water scarcity to inadequate investment in sanitation infrastructure to the inability of many public authorities to meet coverage needs.

The inability of public authorities to provide coverage to their citizens prompted a rise in water-services privatisation contracts between foreign investors and states, such that 10 percent of global consumers now receive their water from private companies. New technologies and the need for additional infrastructure investment will certainly increase demand in the market, potentially spawning billion dollar valuations. Such economic promise and opportunity largely explains why water has earned the moniker of Earth’s “blue gold.” However, there is no specific international regime or regulation for sanitation and water services.

The international economic governance of cross-border sanitation and water services that is emerging is essentially based on international trade and investment treaties. It was precisely this growing role of international economic law that inspired this conference to provide an exhaustive economic and legal analysis of a phenomenon that combines potential high profit, development of new technologies and basic needs for all to access water.

Against this background, the conference objectives were: to improve our understanding of the current international legal framework in relation to the internationalisation of water services, to identify gaps in that framework, especially under the threat of possible climate change, and to propose changes to fill those gaps; to assess whether host States need greater certainty in managing private investment contracts governing the supply of their water by foreign consortiums; to investigate the nature of water as a resource, especially the nascent human right to water and its interaction with economic issues such as water pricing; to inform policymakers and stakeholders about the implications of ‘globalisation’ of water services for the capacity to adapt to climate change in relation to response options for water resources; and, finally, to suggest legal developments which might enable states to better manage vital water services, even after privatisation to foreign companies.

Are water services a form of foreign investment?

Countries have begun to increasingly rely on private sector participation in the water supply sector and the provision of sanitation services. This is due to budget pressures, a drive for greater efficiency in service delivery, and because of the promotion by agency donors for greater private sector participation. A range of options for private sector participation in water supply and sanitation exists, ranging from service contracts for functions such as billing and collection to concessions for complete operations to maintenance and network expansion. Investing in water services can be a very delicate, laborious and unsteady task. While the definition of investment involves some risks, water services appear to be a singular type of investment. Indeed, it simultaneously involves technological means and knowledge, financial funding, and panoply of laws including investment law, international law, human rights standards, contractual rights and obligations, national laws and more. This may be one of the reasons why water investment disputes have surged in recent years.

The most fundamental question in determining whether investment treaties are applicable to water services is whether a given sanitation or water service constitutes a “foreign investment” under international law. Indeed, this definition constantly changes as entrepreneurs, financiers and multinational companies develop innovative investment tools. International Investment Agreements (“IIAs”) tend to adopt a broad definition of “investment” that refers to “every kind of asset” of a foreign investor in a host country, suggesting the agreement covers anything of economic value. Recent interpretations by the ICSID have determined that “investment” has an intrinsic meaning of contribution. If it creates or generates “fruits and value,” it deserves protection as an “investment”. In many IIAs, the oft-used asset-based definition typically includes an illustrative list of assets covered. The categories of investments covered by most Bilateral Investment Treaties (“BITs”) remain substantially identical, namely:

(a) movable and immovable property and other property rights;  (b) interests in the property of companies; (c) claims to money and claims to a performance; (d) intellectual property rights, and (e) concession rights conferred by law or contract. Alternatively, some IIAs focus on foreign investment as an “enterprise” rather than as a variety of assets. Those following the enterprise-based definition pay particular attention to the investor’s objectives for establishing a long-term relationship with the economy of the host country – for example, the acquisition of a lasting interest in the ownership or management of an enterprise. Water sanitation is the process of cleaning water to make it safe for drinking, bathing, cooking and other uses. Common methods of treating water include flocculation, filtration, absorption, ion-exchange, and disinfection. Any and all of these methods require an individual in the host state to own and operate facilities (physical assets) with adequate technical expertise and proper technology to sufficiently purify the water. Therefore, “investment,” for purposes of water sanitation and water services in international law, typically encompasses both facilities invested in by foreigners (tangible assets) as well as the research and development used to create new technologies (intangible assets).

Investment agreements enshrine a series of obligations on the parties aimed at ensuring a stable and favourable business environment for foreign investors. These obligations pertain to the treatment that investments are afforded in the host country, as well as certain guarantees by foreign investors certifying their ability to perform key operations related to their investment. The “treatment” granted to investors encompasses laws, regulations and customs from public entities that apply to, or affect, foreign investors and their investments. All public entities are bound by international obligations, including the federal and sub-federal governments, local authorities, regulatory bodies, and entities that exercise delegated public powers. Measures adopted by private actors can also fall under the scope of international agreements in exceptional circumstances when such private measures can ultimately be attributed to a governmental entity. The set of obligations is rather consistent amongst the majority of bilateral investment agreements. The core provisions found in such investment agreements typically include a most favoured nation treatment obligation, grants of national treatment, obligations to provide fair and equitable treatment, protection and security for foreign investors, and an obligation to allow international transfers of funds. While the substance of these principles remains the same throughout many investment agreements, the scope and reach of each obligation depends on the precise wording featured in each case.

The Proliferation of Sanitation and Water-Related Disputes

Investors have increasingly exercised their arbitration rights under IIAs in recent years. To date, 21 claims dealing with foreign investments in the water industry have been filed internationally. The proliferation of sanitation and water-related disputes before international investment tribunals serves as an important phenomenon. The key feature of investment protection under BITs is that it allows foreign investors to challenge host governments’ actions before an international arbitral tribunal. This is imperative because domestic judicial systems may be biased against foreign interests. Moreover, national courts may be more likely to fall under pressures from other branches of government. The ability of foreign investors to bring their disputes to independent arbitrators provides assurances to the investors that domestic authorities will live up to their international obligations, thus ensuring a favourable and stable investment climate in the host country. This proliferation of water-services disputes must be further analysed by considering the type of services currently provided by foreign investors and the details of the claims and breaches of treaties, which often result in heavy compensation for the winning party.

However, the number of known cases brought to date may only be the tip of the iceberg because many arbitration cases have yet to be released to the public or continue to remain in private negotiation. Before further discussion, it is imperative that we review the typology of the “blue gold” investments and briefly define the types of water services detailed in the 21 known arbitration disputes. A brief look at the diversity of services mentioned will provide a more holistic perspective and a better understanding of the current state of water services as well as the delicate stakes present in these water disputes.

The definition of investment is currently absorbing sanitation and water services, a rather new form of investment in the transnational scenario. Furthermore, international investment law is growing flexible enough to attract these specific types of highly sensitive disputes. International investment treaties and the tribunal in charge of applying these rules have contributed significantly in shaping the contours and substance of an international water service jurisprudence and the emerging international economic water services regime. The investment world fills a gap that no other organisation has been able to address. While an investment tribunal’s main task is to apply treaties, which protect foreign investors, the same tribunals may not be well equipped to consider non-economic issues, such as those essential to the water regulation industry. Although the investment jurisprudence may be seen as progress towards the regulation of an important service, it also emphasises the lack of a more global holistic approach to regulating water services and access to water. Future research is needed to find a means of reconciling the great advances made in the area of investment law with the urgent need of ensuring that the more nascent human right to water receives equal consideration in the coming years.

On a more practical level, water services are no longer solely under the purview of domestic regulation. IIAs apply by default, particularly in the absence of World Health Organisation standards. The international investment regime further contributes to the internationalisation of the water services regime. Conversely, governments must design water-related policies that comply with Fair and Equitable Treatment, expropriation regulation, and Full Protection and Security, since not doing so can be costly and deter foreign investors from providing high quality services. Or, if policy makers do not agree with such a reality, they must re-design and re-engineer the applicable international law.

Most of the time, the term investment is defined very broadly. In order to avoid significant exposure to investment claims one must wonder whether investment should be required to contribute to development. The issue is whether the contribution to development in IIAs should be made an eligibility criterion. Host states would like to be sure that investments would be protected only if they contributed to development. Investors would likely see such a requirement as creating substantial uncertainty as to whether an investment would qualify for protection in the absence of a standard definition of development. If such a requirement were included in a treaty, a host state could claim that the tribunal did not have jurisdiction on the basis that the investment did not contribute to development.

Conclusion

Both the theoretical and practical conclusions drawn by this Article anticipate future developments and assist in exposing the horizon of forthcoming research and debate in the global governance of sanitation and water services. The increasing need for water due to global warming and climate change and new technologies such as shale gas, means that foreign investments in water will increase and a sound public policy consists in anticipating this increase by strictly taking a more proactive approach in thinking and designing the international principles that should regulate water 

Jurisdictions: 

The Chinese University of Hong Kong, Professor

Professor Chaisse is an award-winning specialist in international economic law with particular expertise in the regulation and economics of foreign investment. He also researches in areas such as WTO law, international taxation and the law of natural resources. As a practitioner, he is engaged as an expert, counsel and arbitrator in international dispute settlement. Professor Chaisse currently advises the E15 Task Force on Investment Policy, sponsored jointly by the World Economic Forum (“WEF”) and the International Center for Trade and Sustainable Development (“ICTSD”). His most recent publication is International Taxation – Law and Practice in Hong Kong and China (The Hague: Kluwer Law, 2015).