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Will International Investment Rules Shrink Policy Space for Sustainable Development? Evidence from the Electricity Sector Navroz K. Dubash Albert H. Cho World Resources Institute Washington, DC. Motivation. Policy space for sustainable development
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Will International Investment Rules Shrink Policy Space for Sustainable Development? • Evidence from the Electricity Sector • Navroz K. DubashAlbert H. Cho • World Resources InstituteWashington, DC
Motivation • Policy space for sustainable development • Innovative, heterodox economic, social and environmental policies • Unravelling of the Washington Consensus lends support • But lack of specificity in policy space discussions • Electricity: a good test case • Financial flows: US$20-40 billion per year in 1990s • Social and environmental significance • Transformation from public monopoly to private competition
Question and Approach • Will investment rules constrain policies for sustainable development in the electricity sector? • Are there policies that governments could reasonably seek to pursue that appear inconsistent with investment rules? • Can governments reconcile policy space with investment rules in practice? • Case study approach • Identify innovative electricity policies: social, environmental, economic • Apply likely GATS and investment disciplines – inherently speculative in absence of case law • Burden of proof: policies that countries may reasonably retain the option to implement
Investment Rules • Proposed “Multilateral Investment Framework” (MIF) • Disciplines of particular interest: • Pre-establishment national treatment • Prohibitions on performance requirements • Prohibitions on indirect expropriation • Dispute Settlement
Black Economic Empowerment in South Africa • Goal: to facilitate economic participation by black South Africans • Policy: Several elements: • A proportion of privatized electricity assets reserved for BEE firms • BEE “scorecards” developed for firms based on black ownership, procurement from BEE enterprises and employment equity • Government contracts may give priority to high-scoring firms • Result: Too early to tell
Merits of the policy • Controversial, but cornerstone of development policy • Intended to develop management skills and experience in underprivileged populations • Too early to judge outcomes, but Malaysia may provide guidance
Potential for Conflict • Reserving ownership of electricity assets for local disadvantaged groups is inconsistent with national treatment • Rewarding firms for procuring from BEE firms may be an implicit performance requirement • Future negotiations on services procurement may restrict government ability to reward compliance with BEE
Renewable Portfolio Standards in Arizona • Goal: 1.1% of energy must be from renewable sources by 2007, of which 60% must be new solar capacity • Policy: a “Solar Development Strategy” – “Bonus” production credits go to firms using solar equipment manufactured in Arizona • Result: Has produced a thriving renewable energy industry in Arizona – over $50 million in annual exports
Merits of the policy • Problem of building political consensus • RPS often difficult to pass in US • Renewable energy more expensive • Environment a relatively low priority • Early investor disadvantage • By linking RPS to local job creation and technology development, RPS was easier to sell to a skeptical public
Potential for conflict • Many international investment agreements contain prohibitions on “performance requirements” • In NAFTA, for example, • “No Party may condition the receipt or continued receipt of an advantage…on compliance with any of the following requirements: …to purchase, use or accord a preference to goods produced in its territory” (1106c)
Crisis Management in Argentina • Goal: To mitigate impact of 2001 economic crisis • Policy: Pesofication of utility contracts, utility rate freezes • Results: Economy gradually recovering, but under threat of $17 billion in claims before ICSID
Merits of the policy • During crisis, losses accrued by nationals and local investors • Mandatory contract renegotiation with government and independent oversight • Way to “bail in” private foreign investors
Potential for Conflict • Potential conflict with BITS signed with USA and France, among others • Issues include: • “fair and equitable treatment” • “indirect expropriation” • At least 12 cases filed before ICSID on energy issues • Potentially unequal outcomes for local/foreign investors
Implications for Cancun • Concerns over policy space are real • Difficult to preserve needed space in practice: • Capacity issues and imperfect foresight • National bureaucratic politics • Dynamic changes in policy environment • Cost of inflexibility given changing political contexts
Concluding Thoughts • Cost vs. benefit of MIF? • Costs of policy options foregone may be substantial • What would a development-first investment framework look like? • Root discussion in empirical experience • Look beyond traditional trade disciplines
For further information… • The full paper is available at: • http://pdf.wri.org/investment_rules.pdf • Contact authors: • Navroz Dubash (navrozd@wri.org) • Albert Cho (acho@wri.org)