Will International Investment Rules Shrink Policy Space for Sustainable Development?

1. Will International Investment Rules Shrink Policy Space for Sustainable Development? • Evidence from the Electricity Sector • Navroz K. DubashAlbert H. Cho • World Resources InstituteWashington, DC

2. 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

3. 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

4. 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

5. 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

6. 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

7. 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

8. 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

9. 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

10. 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)

11. 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

12. 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

13. 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

14. 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

15. 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

16. 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)