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PROTECTION OF FOREIGN INVESTMENT AND THE IMPLICATIONS FOR REGULATION OF WATER SERVICES AND RESOURCES: CHALLENGES FOR INVESTMENT ARBITRATION
ANA MARIA DAZA VARGAS 1

1

INTRODUCTION

International Investment Agreements (IIAs) have the primary purpose of protecting and promoting foreign investment, which in turn enhances the economic development of the host country. While under IIAs all economic activities linked to foreign investment are equally protected, it appears that arbitral tribunals do not give due regard to those activities likely to affect environmental sustainability and the right to basic services such as water. It is argued from this perspective that the role of investment arbitrators is significant for the development of standards of protection as these evolve through the legal analysis embedded in arbitral awards, as does the increasing jurisprudence in investment arbitration. This article argues that special consideration needs to be given to the unique nature of water resources, as well as the provision of water services, in order to meet environmental and human development goals such as the Millennium Development Goals (MDGs). Such emphasis is necessary due to current challenges around increasing water scarcity in the context of stiffer competition for limited hydraulic resources between users in various economic sectors. In this context the core issue examined in this article pertains to the tensions that protection of foreign investment has created in relation to the provision of water services and in the field of the environment. In addition, the article considers the application of foreign investment protection standards to secure long-term economic returns on investment, including water rights as production inputs from naturally variable water flows that require a flexible management framework to ensure sustainable development and environmental protection. It is important to note that there are substantial differences between water resources management and water services regulation. Water resources management goals are resource planning, abstraction and water quality. Water services regulation has parallels with other utilities and essential services, with similar infrastructure features. Therefore, it would be `misleading to discuss resources management and services delivery in

the same institutional context'.2 Note, however, that the provision of water services is also related to general water resources management as an integral part of its holistic approach for the provision of bulk water and the management of waterborne waste.

2

WATER SERVICES: ECONOMIC REGULATION AND SOCIAL PERSPECTIVE

The social perspective of water resources is most notably embedded in the provision of water services, which has raised a number of tensions in the area of protection of international investment. The question of how to tackle the challenge of providing universal access to water services and sanitation has long been discussed among international organizations, nongovernmental organizations (NGOs), governments and private investors. In this context, an important part of the debate concentrates on whether water should be provided through public or private investment. Currently one billion people lack safe drinking water and another two and half billion lack access to basic sanitation.3 With 50 per cent population growth in Latin America and the Caribbean and 100 per cent growth in Africa and Asia over the next 25 years,4 significant investment is required, which governments are not always able to provide. The Camdessus Report estimates that an extra $10 billion per year5 would be required to meet the 2015 MDGs, using the most basic standards of service and technology.6 Private investment for the provision of water services currently amounts to only 11 per cent of total investment.7 However, it is likely to increase in the future due to new forms of Public-Private Partnerships (PPP).8 Cecilia
2 World Water Assessment Programme The United Nations World Water Development Report 3: Water in a Changing World (UNESCO Paris/Earthscan London 2009) 51. 3 United Nations Development Programme (UNDP) `Human Development Report 2006: Beyond Scarcity: Power, Poverty and the Global Water Crisis' (2006) 5. 4 M Camdessus, J Winpenny `Financing Water for All: Report of the World Panel on Financing Water Infrastructure' (World Water Council and Global Water Partnership 2003) 5. 5 In 2003, financing drinking water in developing countries amounted to $13 billion a year (n 4) 3. 6 ibid. 7 D L Owen Pinsent Masons Water Yearbook 2007±2008 (Pinsent Masons London 2007) 27. 8 Philippe Marin refers to the forms of public-private partnerships where a private operator no longer participates in the ownership of the infrastructure. This, in turn, implies less risk for the private operator. See P Marin `Public-Private Partnerships for Urban Water Utilities: A Review of Experiences in Developing Countries' (World Bank Washington DC 2009) 8.

1 Contact: a.m.dazavargas@dundee.ac.uk; anamaria.daza@gmail.com. I thank my supervisors Professor Patricia Wouters and Dr Sarah Hendry for their guidance and comments in the preparation of this article. Any mistake or omission remains mine.

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Tortajada, Vice President of the Third World Centre for Water Management, estimates that 15 per cent of the people in developing countries will have access to water and water-related services from private companies by 2020.9 Due to the monopolistic nature of the water utilities infrastructure, regulation of water services is pivotal when provided by private operators. The water services sector, as well as the telecommunications and energy sectors, is dependent on network infrastructure, and therefore it is considered a `natural monopoly'.10 A particular industry is generally considered to be a natural monopoly `if the production of a particular good or service by a single firm minimizes costs'.11 This means that average cost decreases while output increases (up to a certain point), attaining economies of scale. In some contexts, when a natural monopoly is present it might be desirable for reasons of economic efficiency to maintain a monopolistic market structure, as competition of some or many companies will bring about productive inefficiencies. Viscusi et al argue that there is a conflict between allocative efficiency and productive efficiency with regard to natural monopolies. Productive efficiency can be attained when only one firm produces, because `only then is the value of resources used to supply the market minimized'.12 For reasons of profit-maximization, a monopolist has an incentive to charge excessive prices and under-produce, undermining the achievement of allocative efficiency. However, with more than one company producing the same good, productive efficiency would be sacrificed. Therefore, in sectors such as water services, regulation is crucial in order to overcome investors' adverse incentives, while not diminishing the productive efficiency of the monopolistic position. `The principal benchmark for ``just and reasonable'' rate levels has been cost of production, including [. . .] the necessary return to capital.'13 Regulators are expected to strike a balance between consumers' and providers' interests, in line with governmental public policy. This task is likely to be greater for regulators in developing countries, where public policy tends to be less stable and decision making more political. The demise of several water services projects could arguably be attributed to weak regulatory systems, subject to pressures from companies, interest groups and governments. This issue could be analysed from the `capture theory' perspective that addresses the impossibility of regulatory agencies to meet public interest objectives as they appear to be `subverted by pressure, influence, and

``bribery'' to protect the interests of those who were the subject of the regulation'.14 This might have been the case for a number of investment disputes brought to arbitration after the privatization processes carried out in the last two decades. The regulatory measures affecting investors' interests are generally linked to the economic regulation of network infrastructure, price, investment in expansion and access to water services among others. However, other regulatory measures are aimed at meeting the needs and demands of citizens due to social concerns, such as those related to the right to water, water affordability and cross-subsidization. Griffin explains that decision making in the water sector is characterized by a higher degree of public involvement: `[P]eople think of water resources as public property. They feel entitled to water. They have an opinion about it. Because they drink it and know that life isn't possible without it, they can get emotional about water'.15 The next section will address the tensions arising from regulatory measures affecting private operators' investment.

3

KEY ISSUES IN INVESTMENT ARBITRATION

Negotiations of specific agreements for the protection of investment were first carried out by the United States with European countries in the nineteen century. These Treaties of Friendship, Commerce and Navigation concentrated on trade relations and aimed at protecting the property of foreign nationals.16 Long before this, in 1758, Vattel warned:
Owing to the binding character of express promises and agreements, a wise and prudent Nation will carefully examine and maturely consider a treaty of commerce before concluding it, and will take care not to bind itself to anything contrary to its duties to itself and to others.17

Promotion and protection of foreign direct investment through IIAs, such as Bilateral Investment Treaties (BITs) and Free Trade Agreements (FTAs), has acquired great relevance due to its exponential increase in the last two decades.18 This increase is related to an also increasing number of negotiated IIAs.19 The overarching purpose of these agreements is the protection of foreign investment; hence, rights are conferred only to investors, as opposed to balancing rights and
14 A Ogus Regulation: Legal Form and Economic Theory (Clarendon Press Oxford 1994) 57. 15 R C Griffin Water Resources Economics. The Analysis of Scarcity: Policies and Projects (MIT Press Cambridge MA 2006) 2. 16 M Porterfield `International Expropriation Rules and Federalism' (2004) 23(3) Stanford Environmental Law Journal 35. 17 M Vattel Le Droit des Gens ou Principes de la Loi Naturelle (1758), as cited by C McLachlan QC and others International Investment Arbitration: Substantive Principles (1st edn Oxford University Press Oxford 2007). 18 UNCTAD states that by the end of 2008 the total number of BITs amounted to 2676. See United Nations Conference on Trade and Development (UNCTAD) `Recent Developments in International Investment Agreements (2008±June 2009)' IIA Monitor No. 3 (2009): International Investment Agreements (United Nations New York and Geneva 2009) 2. 19 UNCTAD `Investor±State Dispute Settlement and Impact on Investment Rulemaking' (United Nations New York and Geneva 2007) 8.

9 C Tortajada `Private Versus Public in Water Provision: Encouraging Case of Sri Lanka' (case study for the Human Development Report 2006). 10 Note however, that the electricity and telecommunications industries differ from the water industry, in that networks and grids are not shared among the producers of the service. As pointed out by E M Vinnary `The Economic Regulation of Publicly Owned Water Utilities: The Case of Finland' (2006) 14 Utilities Policy 159. 11 W K Viscusi, J M Vernon and J E Harrington Jr Economics of Regulation and Antitrust (3rd edn MIT Press Cambridge MA 2001) 337. 12 ibid 314. 13 A E Kahn The Economics of Regulation: Principles and Institutions (MIT Press Cambridge MA 1988) 63.

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obligations of foreign investors and host states or other stakeholders.20 The novelty within such international agreements is the dispute settlement mechanism, where investors can directly bring host states to arbitration, should their `property rights' be impaired. This mechanism was put forward by the World Bank in 1966 and is administered by the International Centre for the Settlement of Investment Disputes (ICSID).21 The definition of `investment' under international investment law encompasses a wide range of property rights; ```every kind of asset'' is normally used as the leading formula to a non-exhaustive definition of investment'.22 Therefore, property rights are those tangible and intangible rights deemed necessary to the attainment and operation of the investment, eg licences for water use, linked to investments in mining, oil extraction and energy generation. IIAs aim at covering a wide range of economic activities, hence there is a general and almost standardized group of standards of protection, common to most IIAs: a) Nonexpropriation without compensation; b) Fair and equitable treatment; c) Full protection and security; d) National treatment; and e) Most-favoured-nation treatment. The scope of each standard is primarily stated by the agreement and secondarily interpreted by the arbitrators. The notion of expropriation has also developed over time and is currently widely used. The traditional notion of `political risk' adopt encompasses direct expropriation, nationalization of assets, forced renegotiations of contracts and harassment of foreign investors.23 Expropriation has now adopted new forms where `[o]wnership is not transferred, but the ``normal'' commercial functioning of business operations is unexpectedly impaired' generally under the form of governmental regulations. `Regulatory risk'24 can adopt the form of higher environmental standards, certain levels of prices for infrastructure, and health, security and human development concerns; all these have given rise to a now broader notion of the concept of `property'.
20 H Mann `Implications of International Trade and Investment Agreements for Water and Water Services: Some Responses from Other Sources of International Law' (2006), available at http://www.idrc. ca/en/ev-102451-201-1-DO_TOPIC.html, 14. 21 The ICSID Convention is a multilateral treaty under the auspices of the World Bank. It was opened for signature on 18 March 1965 and entered into force on 14 October 1966. `The Convention sought to remove major impediments to the free international flows of private investment posed by non-commercial risks and the absence of specialized international methods for investment dispute settlement. ICSID was created by the Convention as an impartial international forum providing facilities for the resolution of legal disputes between eligible parties, through conciliation or arbitration procedures. Recourse to the ICSID facilities is always subject to the parties' consent'. International Centre for the Settlement of Investment Disputes http:// icsid.worldbank.org/ICSID/FrontServlet?requestType=CasesRH& actionVal=ShowHome&pageName=AboutICSID_Home. 22 Organisation for Economic Co-operation and Development (OECD) International Investment Perspectives: 2006 Edition (OECD Paris 2006) 148. 23 See T Waelde and S Dow `Treaties and Regulatory Risk in Infrastructure Investment: The Effectiveness of International Law Disciplines Versus Sanctions by Global Markets in Reducing the Political and Regulatory Risk for Private Infrastructure Investment' (2000) 34(2) Journal of World Trade 5. 24 ibid.

A number of disputes around the provision of water services arose not only due to a regulatory measure affecting an investor's economic returns; termination of concession contracts and reversion of the control over infrastructure have also given rise to investment disputes between investors and host states. Some of these cases are addressed in the next section.

4

INVESTOR-STATE INVESTMENT ARBITRATION OVER REGULATION OF WATER SERVICES

The number of international investment arbitration cases in the water services sector has increased in the last 20 years, after a flow of foreign investment into developing countries. Investors found a niche for business in the process of privatization of network infrastructure, supported by the World Bank and other financial institutions. Telecommunications, energy, oil, transport and water were transferred to the control and administration of investors, under the expectation of providing more efficient and better quality services, but also under the assumption that further investment would expand the infrastructure, hence providing services to a broader sector of citizens. For some of the privatized sectors this was the case. On the one hand, telecommunications could be considered a success of the privatization trend; on the other hand, privatization of water services is often regarded as a failure. This section looks at three notable disputes over water services.

4.1

Aguas del Tunari v Bolivia 25

The outcome of the privatization process in Cochabamba, Bolivia proved to be emotional and turbulent. In 1999 the Bolivian Government, after a public bidding process, granted a concession contract for the provision of water services to Aguas del Tunari (a subsidiary of International Water Limited of the United States) for a period of 40 years. The setting of the tariff included the costs involved in the provision of the services, as well as expected investment in the infrastructure project (Proyecto Misicuni), which was in its early phase. The disproportionate increase in price caused social unrest that ended with the expulsion of the company from the city and the cancellation of the concession contract. An investment dispute against the Government of Bolivia was brought by the investor before ICSID, claiming US$50 million in compensation.26 The proceedings did not reach an award due to an active lobby of NGOs advocating for the right to water of the citizens of Cochabamba. The Government of Bolivia avoided a detrimental compensation ± assuming arguendo that the arbitral tribunal found a breach of Bolivia's obligations under the BIT ± as Bechtel and Abengoa, main shareholders of Aguas del Tunari, settled the case `for a token payment of 2 Bolivianos (about USD 0.30)'.27 This case illustrates the power of
25 Aguas del Tunari SA v Republic of Bolivia (ICSID Case No. ARB/02/ 3) (Aguas del Tunari v Bolivia). 26 The Democracy Center On-Line `Bechtel VS. Bolivia: The People Win!!' (2006) http://www.democracyctr.org/newsletter/vol69.htm. 27 S Spronk and C Crespo `Water, Sovereignty and Social: Investment Treaties and the Struggles against Multinational Water Companies in

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the population when basic rights are at stake; it also shows the influence and participation of NGOs in the international investment arena.

4.2

Biwater v Tanzania 28

In 2003 Tanzania started a process of privatization of its water utility infrastructure with funding from the World Bank and other financial institutions. US$140 million was intended to repair, expand and update the Dar es Salaam water and sanitation systems. Biwater Gauff, incorporated as City Water Services Limited, was granted a 40-year concession for the provision of water services, as the only bidder in the process. To this end, it signed three contracts with the Dar es Salaam Water and Sewerage Authority (DAWASA). City Water's project eventually failed, due to difficulties in meeting its contractual obligations regarding billing and collection of tariffs from consumers. Various measures were adopted by DAWASA and Tanzanian government officials in order to recover the control of the water services company, including the cancellation of the contract, the occupation of City Water's facilities, taking over the management of the company and deportation of senior managers.29 The tribunal determined that the investor had performed poor management of the utility as from the bidding process and had failed to meet some of its contractual obligations. It did find the Tanzanian government measures to be expropriatory, but it did not grant any compensation in favour of the investor since the economic value of the utility was nil. The tribunal concluded that by the time of the wrongful acts by Tanzania the value of the assets was already zero and that termination of the contract was inevitable in any event.30 Therefore, according to the tribunal there was no causation between the wrongful acts of Tanzania and loss and damages suffered by the company, as the defendant was not the cause of City Water's economic failure. In this vein, Peter Muchlinski asserts:
Any losses that subsequently arise out of an inaccurate risk assessment will be borne by the investor. They will not be recoverable under the terms of the investment treaty. [. . . fair and equitable treatment . . .] is also a principle that is consistent with good business practice, as it requires the investor to take responsibility for the normal commercial risk associated with the investment rather than to find a source of insurance in the host country's obligations under the applicable investment agreement. The development of such a principle is justified by the view that IIAs are not insurance policies against bad business judgments.31

fully favoured Tanzania, as the tribunal concentrated its analysis especially on the country's obligation of investment protection under the BIT, to conclude solely whether there was expropriation of investor's assets or not. Tribunals still appear far from considering the vital importance of water services among the population of the host country; therefore, such analysis is also absent in the arbitral award.

4.3

Vivendi v Argentina 32

In 1995, during the Argentinean privatization process, Vivendi Universal from France and Aguas de Aconquija from Argentina signed a 30-year concession contract with the Province of Tucuman for the provision of water services and sewage. The contract provided for investors' obligation to improve the quality of the services, for which it required substantial investment. The high level of the tariffs forced the newly elected government of Tucuman to ask the investors for a tariff reduction. Different governmental institutions continuously urged them to reduce tariffs, according to the provisions of the contract. Attempts to renegotiate the concession contract in order to lower the tariffs also failed. The situation was exacerbated by two incidents of turbidity in the drinking water that led the Ministry of Health to warn the citizens of Tucuman of dangers to their health from diseases such as cholera, typhoid and hepatitis. Moreover, the government of Tucuman encouraged consumers not to pay for the services. Finally, the contract was terminated in August 1997 but the investors were required to continue providing the services for almost another year. The case was submitted before ICSID in two opportunities, since the first decision was annulled in 2003. The investors claimed that Argentina had breached the fair and equitable treatment as well as the non-expropriation standards provided for under the BIT between Argentina and France. The tribunal's decision conceded that Argentina had violated its obligations under the BIT and granted the claimants US$105 million compensation. Regarding the breach of the non-expropriation standard, the tribunal found inspiration in Santa Elena v Costa Rica 33 ± which will be addressed below ± and contended that public interest does not alter the expropriatory measure for which compensation is due.34 The tribunal approached the issue from the perspective of the `sole effects' doctrine and contended that it is the effect of the measure and not the intent of the government that is the determining factor for the violation of the non-expropriation standard.35 Schreiber states that to date no host state has yet invoked the compliance of human rights obligations to

Whilst the award was evidently unfavourable to Biwater, arguably it could not be concluded that it

Cochabamba and El Alto, Bolivia' (2008) 1 Law, Social Justice & Global Development Journal (LGD) 8. 28 Biwater Gauff (Tanzania) Limited v United Republic of Tanzania (ICSID Case No. ARB/05/22) (Award: 24 July 2008) (Biwater Gauff v Tanzania). 29 A K Bjorklund `ICSID Tribunal Finds Tanzania to Have Violated Bilateral Investment Treaty but Declines to Award Any Damages' (2008) 12(27) ASIL Insights. 30 Biwater Gauff v Tanzania (n 28) para 799. 31 P Muchlinski ```Caveat Investor''? The Relevance of the Conduct of the Investor under the Fair and Equitable Treatment Standard' (2005) 55 International and Comparative Law Quarterly 542.

ÄÂ 32 Companõa de Aguas del Aconquija SA and Vivendi Universal SA v Argentine Republic (ICSID Case No. ARB/97/3) (Award: 20 August 2007) (Vivendi v Argentina). Ä 33 Compania del Desarrollo de Santa Elena SA v Republic of Costa Rica (ICSID Case No. ARB/96/1) (Award: 17 February 2000 and Rectification of Award of 8 June 2000) (Santa Elena v Costa Rica). 34 Vivendi v Argentina (n 32) para 7.5.21. 35 ibid para 2.5.20.

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justify a regulatory measure under dispute: `Instead, existing jurisprudence is limited to what tribunals have reasoned based upon investor claims, which has so far favored investors' rights'.36 Whilst a body of precedent cannot be expected in investment arbitration law, evolution of standards of protection and a consistent approach toward the holistic nature of water resources may well be expected in the coming years. This would constitute a further step in the analysis of water-related cases, which is paramount to meet the MDGs as well as the challenges of increasing variability of water resources and climate change.

States to prevent air pollution. However, in the long run, the additive turned out to be an environmental threat to ground and drinking water due to its highly soluble characteristics. This would have an effect on the availability of clean water during drought years in California. The case was brought before ICSID under Chapter XI of the North American Free Trade Agreement (NAFTA),39 where the arbitral tribunal rejected the claim against the United States for expropriation. In doing so, it adopted a `police powers'40 approach to justify the adoption of a regulation for public purposes.41 The tribunal stated as follows:
`[A] non-discriminatory regulation for a public purpose, which is enacted in accordance with due process and, which affects, inter alios, a foreign investor or investment is not deemed expropriatory and compensable.42

5

APPLICATION AND INTERPRETATION OF INTERNATIONAL INVESTMENT AGREEMENTS BY ARBITRAL TRIBUNALS: SOME LESSONS DRAWN FROM ENVIRONMENTAL REGULATION

As seen above, the regulation of water services aiming at the realization of the right to water could hinder host states' prerogative to regulate. The issue of regulatory risk was addressed by Orr et al: `[It] arises when a change in law or regulation increases the costs of operating a business, reduces the attractiveness of investment and/or changes the competitive landscape. Change to the regulatory regime around water can be one such risk'.37 Similar tensions can be seen between environmental regulation and the protection of foreign investment, from which some parallels can be drawn in cases related specifically to water resources. Development of environmental standards, as well as adoption of adaptive measures toward greater environmental sustainability do not only concern developing countries; they also affect developed countries. A first source of potential tension is between secure rights for investors against adaptive and flexible regulation for water resources and services. The former demands a static legal environment, where secure property rights are guaranteed. This situation conflicts with the concept of regulatory flexibility required in water management. This tension, which reflects a deeprooted conflict between public and private interests, requires investment arbitration to evolve toward the recognition that environmental sustainability and water services are crucial for human development. In Methanex Corporation v the United States of America 38 the state of California adopted a regulation prohibiting the use of the gasoline additive MTBE, which was originally approved and used in the United

However, the approach of a tribunal could differ substantially from the one adopted in Methanex v United States, as was the case in Metalclad Corporation v United Mexican States.43 The regulatory measure was an Ecological Decree declaring a Natural Area for the protection of rare cactus. The Natural Area encompassed the area of the landfill, granted to Metalclad for the operation of hazardous waste. Metalclad claimed that it was prevented from operating in the landfill. Regardless of the acquiescence of governmental authorities they were still denied a permit by the Municipality of Guadalcazar. In addition, Metalclad relied on the Ecological Decree as an additional element in its claim of expropriation under Chapter XI of NAFTA, arguing that it effectively and permanently precluded the operation of the landfill.44 In this case the arbitral tribunal found the regulatory measure expropriatory, stating there was no need to decide or consider the motivation of the Ecological Decree,45 thereby adopting the `sole effects' doctrine.46 These cases portray two diverse and conflicting approaches toward environmental protection. Under NAFTA, the United States and Mexico were under obligation to protect investors' property rights according to the treaty provisions, so that was the point of
39 The North American Free Trade Agreement between the Government of Canada, the Government of the United Mexican States and the Government of the United States of America was signed at Ottawa, on the 11th day and the 17th day of December 1992, Mexico, DF, on the 14th day and the 17th day of December 1992, Washington, DC, on the 8th day and the 17th day of December 1992. It entered into force on 1 January 1994. 40 The `police powers' doctrine gives weight to the purpose and the circumstances of the governmental action. 41 In this regard Howard Mann contends: `The Methanex Tribunal took an approach much more akin to a classic police powers approach under international law. It did so without using those words, however, and thus without having to parse through the implications of what appeared to be the United States' argument that the police powers applied to health measures but may not have extended to environmental measures'. See H Mann `The Final Decision in Methanex v. United States: Some New Wine in Some New Bottles' (International Institute for Sustainable Development 2005) 5. 42 See Methanex v United States (n 38) Final Award of the Tribunal on Jurisdiction and Merits 2005 Part IVD p 4. 43 Metalclad Corporation v United Mexican States (Metalclad v Mexico) (ICSID Case No. ARB(AF)/97/1) (Final Award: 30 August 2000). 44 ibid. 45 ibid para 111. 46 The `sole effects' doctrine concentrates on the effect that the regulatory measure has had on the investor.

36 W Schreiber `Realizing the Right to Water in International Investment and Law: An Interdisciplinary Approach to BIT obligations' (2008) 48 Natural Resources Journal 466. See Tecnicas Medioambientales Tecmed v United Mexican States (Tecmed v Mexico) (ICSID Case No ARB(AF)/00/2) (Award: 29 May 2003) para 116; Santa Elena v Costa Rica (n 33) para 72. 37 S Orr A Cartwright and D Tickner `Understanding Water Risks: A Primer on the Consequences of Water Scarcity for Government and Business' (World Wildlife Fund 2009) 31. 38 Methanex Corporation v United States of America (Methanex v United States) Arbitration under Chapter 11 of the North American Free Trade Agreement and the UNCITRAL Arbitration Rules (Award: August 2005).

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departure for the analysis undertaken in the cases at hand. However, the approach adopted by each tribunal, ie the `sole effects' doctrine versus the `police powers' doctrine, undermined the predictability of the outcome of the disputes and that whilst the outcome could still be different, what is needed essentially is the consistent application of a single approach. A second source of potential tension relates to investment arbitrators' ± potential ± disregard for issues of global concern such as environmental sustainability or the attainment of the MDGs, where water resources may well be the subject matter of the dispute. When an arbitral tribunal is confronted by a water-related investment dispute, under an IIA, it will determine whether the host state has provided adequate protection to the investor's property rights. If not, it may grant compensation to the investor. The risk of disregarding other societal values is becoming apparent under international investment arbitration. In this vein, Stewart argues that `global regulatory bodies disregard or give inadequate consideration to a range of important social, economic, cultural, environmental and other interests and values [. . .] impacted by their decisions'.47 In Santa Elena v Costa Rica,48 the arbitral tribunal stated as follows:
Expropriatory environmental measures ± no matter how laudable and beneficial to society as a whole ± are, in this respect, similar to any other expropriatory measures that a state may take in order to implement its policies: where property is expropriated, even for environmental purposes, whether domestic or international, the state's obligation to pay compensation remains.49

As opposed to the Santa Elena case, some arbitral tribunals have considered that regulatory interventions do not amount to expropriation. In Methanex v United States and Saluka v Czech Republic,52 arbitrators did not find that a regulatory measure adopted in a nondiscriminatory manner and according to due process amounted to expropriation. In Feldman v United States 53 the tribunal noted that:
[G]overnments must be free to act in the broader public interest through protection of the environment, new or modified tax regimes, the granting or withdrawal of government subsidies, reductions or increases in tariff levels, imposition of zoning restrictions and the like. Reasonable governmental regulation of this type cannot be achieved if any business that is adversely affected may seek compensation, and it is safe to say that customary international law recognizes this.54

The fourth and final potential tension between regulation of water resources and investment protection lies in the non-binding nature of arbitral awards. Arguably this undermines the reliance of host states as well as investors on such a mechanism of dispute resolution. The fear of an unfavourable award would deter the regulatory prerogative of states and may compromise the economic and human development of the country.55 As Solanes explains: `The interpretation of such guarantees [standards of protection] has created a gap between national legislation on public interest issues and the decisions of arbitration courts'.56 In October 1999, the American corporation Sun Belt Water Inc filed a Notice of Claim and Demand for Arbitration against the Government of Canada, under Chapter 11 of NAFTA. The claimant argued that the Government of Canada had imposed a national ban on the export of fresh water by marine tanker from the Great Lakes that had reduced the worldwide supply of fresh water for export. It also requested the restoration of the fresh water export licensing arrangements for bulk shipment by marine tanker. Temporary lost business opportunity costs were claimed in the order of US$468 million that could rise to a loss of $1.5 billion.57 The case did not proceed to arbitration, due to a settlement between the parties. The amount agreed by the parties remains unknown. However, it

Santa Elena does not necessarily represent a unique stance toward the protection of the environment in investment arbitration, but it re-inforces the argument that arbitrators do not give especial considerations to higher societal values. The decision in Santa Elena also illustrates a third source of potential tension between investors and host states, namely `compensatory regulation'. What constitutes a `normal government regulation' or an `impermissible indirect expropriation' is still the subject of discussion not only at the heart of the international investment arbitration sphere, but also among academics, practitioners and international organizations.50 According to Newcombe:
The thorny question is: what is a legitimate and bona fide exercise of state police powers that justifies a complete deprivation of property with no corresponding obligation to pay compensation? International law does not provide a clear answer to this question.51

47 R B Stewart Accountability and the Discontents of Globalization: US and EU Models for Regulatory Governance (Paper presented to the Hauser Colloquium on Globalization and its Discontents September 2006), available at www.law.nyu.edu/kingsburyb/fall06/globalization/ speakers_papers.html, 5. 48 Santa Elena v Costa Rica (n 33). 49 ibid para 72. 50 OECD Directorate for Financial and Enterprise Affairs ```Indirect Expropriation'' and the ``Right to Regulate'' in International Investment Law' (Working Papers on International Investment No 2004/4). 51 For a discussion, see A Newcombe `The Boundaries of Regulatory Expropriation in International Law' (2005) 20(1) ICSID Review.

52 Saluka Investments BV (the Netherlands) v the Czech Republic Arbitration under UNCITRAL Arbitration Rules 1976 (Partial Award: 17 March 2006) para 262. 53 Marvin Roy Feldman Karpa v United Mexican States (ICSID Case No. ARB(AF)/99/1) (Final Award: 16 December 2002). 54 Feldman v United States (n 53) para 103. 55 It is important to stress, at this point, that the author is aware of the fact that the tensions mentioned above are not a black or white issue, where host countries' regulatory prerogative is hindered by the power of rich and powerful investors. Good governance and secure environments for investment, linked to legitimacy of governments and policies, are relevant for the success of foreign investment, and play a pivotal role in the attraction of international investment. It has been alleged that countries willing to import foreign capital have improved their governance mechanism and legal systems greatly, due to the prospective benefits of foreign investment. 56 M Solanes `Water Services and International Investment Agreements' in C Ringler, A K Biswas and S Cline (eds) Global Change: Impacts on Water and Food Security (Springer Berlin/Heidelberg 2010) 210. 57 Sun Belt Water Inc v Her Majesty the Queen Notice of Claim and Demand for Arbitration 12 October 1999.

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raises concerns over the pressure put on governments as to whether they could defend their case before an investment tribunal, or whether a settlement without addressing the merits would be a lesser evil. The ongoing discussion regarding the necessity of consistency and predictability in international investment arbitration touches upon issues of public interest such as environmental sustainability and human rights. The next section addresses the issues arising from inconsistent interpretation and application of IIAs.

common reasoning, methodology and substantive as well as procedural rules, as opposed to commercial arbitration, where decisions are formulated for private parties. Investment arbitration is moving towards consolidating jurisprudence.62 Recent examples of inconsistent awards originate in the application of the United States±Argentine Republic BIT,63 in which arbitrators arrived at `diametrically opposed' decisions regarding the same issues `even when [tribunals] shared members in common'.64 A first group of regulatory measures consist of one general law, in this case the `Emergency Law' adopted by Argentina and applied on a non-discriminatory basis across most sectors of the economy, ie from financial services to public basic services. The arbitration awards, on the contrary, discriminate among investors, as they justify the measure in some cases and find it unlawful in others. CMS v Argentinean Republic,65 Enron v Argentinean Republic 66 and LG&E v Argentinean Republic 67 brought claims before three different tribunals against the same regulatory measure, an Emergency Law converting US dollars tariffs into pesos. All companies shared the same nationality; hence the same BIT (United States± Argentina) was applied. Notwithstanding, the tribunals approached the issue from different perspectives, and the outcomes were also different.68 The significance of the conflicting methodologies chosen by the arbitrators to interpret the relationship between the operative treaty exception and relevant customary law (in this case the state of necessity)69 played a decisive role in the fate of the investors and the host state. Within the sphere of environmental regulation, Methanex v United States 70 and Metalclad v Mexico 71 constitute examples of divergent approaches to what appears to be the same regulatory measure.

6

IS THERE AN EVOLUTION OF INTERNATIONAL INVESTMENT ARBITRATION THROUGH A BODY OF MOUNTING JURISPRUDENCE?

The absence of binding precedent in investment arbitration results in inconsistent application, interpretation and enforcement of IIAs and uncertainty for the parties. However, there is a current view that investment adjudication increasingly gives shape to a body of jurisprudence, along with the development of standards of protection embedded in IIAs.58 Secondly, it illustrates the dangers of inconsistent approaches in this area of law. Finally, it attempts to highlight the role of arbitrators shaping such standards of protection as this role becomes decisive for the attainment of environmental sustainability and universal access to water. The nature of investment arbitration requires a case by case basis analysis as well as consideration of the specific merits of each case. However, an approach of this kind presents some risks due to the different assumptions adopted by adjudicators to arrive at a conclusion. Therefore, even when a measure is identical, under the same IIA and all circumstances alike, outcomes can be diverse. Inconsistent awards have been widely criticized for their contribution to the fragmentation of international economic law.59 This has consequences of fragmentation at lower levels, such as management of water resources and regulation of water services. Currently, there is growing consideration for each other's decisions among arbitrators, which has led scholars to suggest that development of standards of protection takes place in a casuistic manner.60 Waelde has addressed the problem of consistency in his dissenting opinion in Thunderbird v Mexico,61 asserting that international investment jurisprudence is possibly emerging through a group of awards that share
58 See R Dolzer and F Bloch `Indirect Expropriation: Conceptual Realignments?' (2003) 5 International Law Forum du Droit International; A K Bjorklund `Investment Treaty Arbitral Decisions as Jurisprudence Constante' UC Davis Legal Studies Research Paper 158 (SSRN eLibrary 2008). 59 A van Aaken `Fragmentation of International Law: The Case of International Investment Protection' (2008) XVII Finnish Yearbook of International Law (U of St Gallen Law and Economics Working Paper No 2008-1). 60 Dolzer and Bloch (n 58). 61 International Thunderbird Gaming Corporation v The United Mexican States Arbitration under Chapter Eleven of the North American Free Trade Agreement (Award: 26 January 2006) (Thunderbird v Mexico).

62 T Waelde `Separate Opinion in the Arbitration under Chapter XI of the NAFTA and the UNCITRAL Arbitration Rules: Thunderbird/ Mexico' Arbitral Award in the NAFTA arbitration under the UNCITRAL Arbitration Rules Thunderbird v Mexico (n 61) para 15. 63 Treaty Between the United States of America and the Argentine Republic Concerning the Reciprocal Encouragement and Protection of Investment, with Protocol, signed at Washington on 14 November 1991; and Amendment to the Protocol effected by exchange of notes at Buenos Aires on 24 August and 6 November 1992. 64 A K Bjorklund `Emergency Exceptions: State of Necessity and Force Majeure' in P Muchlinski O Federico and C Schreuer (eds) The Oxford Handbook of International Investment Law (Oxford University Press New York 2008). See also CMS Gas Transmission Company v Argentina) (CMS v Argentina) (2005) 44 ILM 1205, 1211 (Award: May 2005), as compared to Enron Creditors Recovery Corporation (formerly Enron Corporation) and Ponderosa Assets LP v Argentine Republic) (Enron v Argentina) (ICSID Case No. ARB/01/3) (Award: May 2007); and Sempra Energy International v Argentine Republic (Sempra v Argentina) (ICSID Case No. ARB/02/16), (Award: September 2007) all of them under the United States±Argentina BIT. 65 CMS v Argentina (n 64). 66 Enron v Argentina (n 64). 67 LG&E Energy Corp, LG&E Capital Corp and LG&E International Inc v Argentine Republic (ICSID Case No. ARB/02/1) (Award: 25 July 2007). 68 See Bjorklund (n 64). 69 J Kurtz `Adjudging the Exceptional at International Law: Security, Public Order and Financial Crisis' (The Jean Monnet Working Paper Series 06/08 2008) 13. 70 Methanex v United States (n 38). 71 Metalclad v Mexico (n 43).

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Specific concerns, such as the environment, public health and human development can either respond to purely national initiatives or be part of broader transnational regulation, adopted at the heart of international initiatives. Water resources and services certainly raise such concerns. In the words of Conca, `water is indeed subject to governance that is increasingly, though certainly not exclusively, global'.72

7

WATER RESOURCES MANAGEMENT AND PROTECTION OF INTERNATIONAL INVESTMENT: POTENTIAL FOR CONFLICT?

Traditional regulation of water resources is evolving toward more flexible approaches to water management in order to tackle current and future challenges around water stress and climate change. This section addresses potential conflicts arising from adaptive and flexible regulation of water resources with protection of international investment obligations, under international investment law. As law evolves, expands and specializes, overall normative coherence becomes elusive and the likelihood of potential conflicts linked to interplay between different areas of law increases. This is the case in areas such as water law and international investment law. On the one hand, national governments generally adopt a holistic approach to the management and regulation of water resources and water services. On the other hand, international investment law aims at the protection of foreign investment through stable and secure property rights, which constitute an international obligation for host countries. Munoz argues that both obligations constitute two divergent duties: a) foreign investment protection may undermine the regulation of water resources (management and services); and b) regulation of water resources could be a potential factor of foreign investment expropriation.73 Water law aims at implementing principles of water resources management at the local level, taking into consideration the needs of different users for purposes of allocation of water rights. Until recently, the most obvious reason for the interplay of these two areas of law was the provision of water which has proven conflictive, due to its social and sensitive nature. However, new types of disputes are likely to arise when prioritization, allocation and reallocation among competing users are deemed necessary to cope with hydrological variability and water scarcity issues. This means that at the national level governments may require adaptive and prompt regulatory flexibility; whereas at the international level investors' enjoyment of their property rights requires certainty and security. In the past, traditional water legal regimes aimed at creating a secure environment for water rights,74 which
72 K Conca Governing Water: Contentious Transnational Politics and Global Institutions Building (MIT Press Cambridge MA 2005) 5.   73 H A Munoz `La Administracion Del Agua Y La Inversion Extranjera  Directa ¿Como Se Relacionan?' in Universidad de Costa Rica (UCR)  (ed) Estudios En Homenaje Al Dr. Rafael Gonzalez Ballar (Isolma SA  San Jose 2009) 4, 12. 74 See D A Tarlock `National Water Law: The Foundations of Sustainable Water Use' (2004) 15 Journal of Water Law 121; D A Caponera

have generally been allocated according to expected historical availability75 and the particularities of each country, very much in line with current conventional property regimes and prima facie consistent with investment protection under IIAs. Nonetheless, water is the result of a hydrological cycle that is variable and increasingly unpredictable, which in turn affects the amount of water flowing into watersheds. Therefore, legal regimes for water rights evolved differently from other major regimes of general property and do not wholly follow the security standard mentioned above. Thus, for reasons of public interest and interrelated common use, water rights regimes cannot usually guarantee complete property rights.76 Furthermore, adaptive management to competing uses due to increasing demand, plus additional pressures on water, such as population growth, economic development, migration and climate change, requires prioritization of water uses. This, in turn, involves the necessity of a more flexible approach toward allocation and reallocation of water rights. Sadoff and Muller suggest that, due to climate change, it will not be possible to expect water to meet the same historical patterns; therefore, `past rights and mechanisms may no longer be viable'.77 Integrated Water Resources Management (IWRM) has become an internationally recognized policy tool. It has been at the top of the global agenda since 1992 when the International Conference on Water and the Environment (ICWE) proposed four general guiding principles for the management of water resources:
1) fresh water is a finite and vulnerable resource, essential to sustain life, development and the environment; 2) water development and management should be based on a participatory approach, involving users, planners and policy-makers at all levels; 3) women play a central part in the provision, management and safeguarding of water; and 4) water has an economic value in all its competing uses and should be recognized as an economic good.78

IWRM has been further developed through `Agenda 21',79 the International Conference on Freshwaters80 and the Johannesburg World Summit on Sustainable Development,81 among others.

`Possible Contents of and Reasons for Water Law' in D A Caponera and M Nanni (eds) Principles of Water Law and Administration: National and International (Taylor & Francis London 2007) 145; S Hodgson Modern Water Rights. Theory and Practice (Development Law Service FAO Legal Office Food and Agriculture Organization of the United Nations Rome 2006). 75 C W Sadoff and M Muller `Perspectives on Water and Climate Change Adaptation. Better Water Resources Management ± Greater Resilience Today, More Effective Adaptation Tomorrow' (Global Water Partnership Stockholm 2009) 11. 76 See Tarlock (n 74) 121±2. 77 Sadoff and Muller (n 75). 78 Dublin Statement on Water and Sustainable Development (ICWE Dublin Ireland 31 January 1992). 79 Agenda 21, reproduced in Annex II Vol I `Report of the United Nations Conference on Environment and Development' (14 June 1992) UN Doc A./Conf.151/26/Rev.1 (United Nations New York 1993) at 288±9. 80 International Conference on Freshwater (Bonn Germany 3±7 December 2001). 81 Plan of Implementation of the World Summit on Sustainable Development, Report of the World Summit on Sustainable Development (Johannesburg South Africa August 26 September 4 2002) UN Doc. A/Conf.199/20 at 6, reprinted at http://www.johannesburgsummit. org/html/documents/documents.html.

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Competition among water users is likely to be exacerbated due to increasing water demand and climate change. Industry and services sectors have started to adopt an active role toward the management of water resources. Struggles over water resources are not new. In 2005, The Economist addressed the struggles of Coca-Cola in India due to use of water resources:
[T]he similarities between Coca-Cola and BP end, for the question of water is far more important to Coca-Cola than the issue of climate change is to BP. That is because if oil and gas run out, or are deemed too dirty to use one day, BP could still peddle ethanol or hydrogen fuel; it is, in the end, an energy company. Coca-Cola, on the other hand, simply would not exist without water. So while BP may yet see life beyond petroleum, Coca-Cola will never get Beyond Water.82

water sustains life, effective management of water resources demands a holistic approach, linking social and economic development with protection of natural ecosystems. Effective management links land and water uses across the whole of a catchment area or groundwater aquifer'.86

The economic value of water resources was recognized in the fourth principle of the Dublin Statement:
Water has an economic value in all its competing uses and should be recognized as an economic good ± Within this principle, it is vital to recognize first the basic right of all human beings to have access to clean water and sanitation at an affordable price. Past failure to recognize the economic value of water has led to wasteful and environmentally damaging uses of the resource. Managing water as an economic good is an important way of achieving efficient and equitable use, and of encouraging conservation and protection of water resources.87

In this vein, the 2030 Water Resources Group published `Charting Our Water Future: Economic Frameworks to Inform Decision-making'83 aimed at proposing an integrated strategy to face the challenges of water scarcity and dialogue among stakeholders. The group focused on technical issues and cost reducing strategies to tackle problems around water resources. Big  global players such as Coca-Cola, Nestle and New Holland Agriculture were part of this group, which suggests an increasing will to cooperate rather than resorting to traditional methods of investment protection such as international investment arbitration. Environmental regulation has been subject to inconsistent arbitral decisions, damaging the predictability and security of the mechanism. This imposes a high level of risk on investors as well as host states in the water resources sector.

From an economic perspective, national authorities are confronted with numerous trade-offs, as they are called to apportion water for irrigation purposes and food production, energy generation, provision of drinking water and industries. In addition, water is needed to protect environmental flows as well as to guarantee the sustainability of future generations.88 Water must not only be considered as a production input subject to increasing demand from a quantitative perspective, but available water resources must also be considered from a qualitative viewpoint as an environmental medium affected by pollution, which makes water unusable or requires extensive treatment or dilution.89 As opposed to oil, gas and coal, water has no possible substitutes at present. Therefore, if all uses of water were ± hypothetically ± priced, water's price elasticity demand would be virtually inelastic, which means that users would be willing to pay any price for water as there is no alternative source they could switch to when water prices raise. Gleick argues that the `ultimate water backstop is still water, from an essentially unlimited source'.90 Therefore, arguably there are no other sources that could `backstop' water prices (cross-price elasticity demand).91 In contrast, alternative sources of energy can backstop oil prices. Whilst rises in oil prices are expected due to depletion of fossil fuels, rises in water prices constitute an extremely sensitive issue, given the highly social component of water. Climate change is increasingly addressed as a new driver for water stress. Its impacts are more apparent and regulatory measures are deemed necessary to

8

THE UNIQUE NATURE OF WATER RESOURCES: FROM DIVERSE PERSPECTIVES

This section contends that water has a unique and indivisible nature. To justify this nature, it can be seen through different lenses. While it meets various needs, it is also subject to competing uses, leading to tension among them. The finite quantity and non-substitutability of water resources results in competition among societal uses in various sectors, whilst hydrological variability, especially in the context of climate change, implies a minimal level of certainty for water users. From an environmental perspective, water is a finite and vulnerable resource.84 Available fresh water resources for common consumption amount to only 1 per cent of water present on the planet. Whilst the amount of water is apparently invariable in nature and infinitely renewable, the supply of water is finite.85 Therefore, a holistic approach to the management of water resources is required. Such an approach is rooted in the first principle of the Dublin Statement:
Fresh water is a finite and vulnerable resource, essential to sustain life, development and the environment ± Since

82 The Economist `Coca-Cola in Hot Water: The World's Biggest Drinks Firm Tries to Fend off its Green Critics' (6 October 2005). 83 The 2030 Water Resources Group `Charting Our Water Future: Economic Frameworks to Inform Decision-making' (2009). 84 Dublin Statement (n 78). 85 UNDP (n 3).

86 Dublin Statement (n 78). 87 ibid. 88 Griffin (n 15) ch 2. 89 M Palaniappan and P H Gleick `Peak Water' in P H Gleick and others (eds) The World's Water 2008±2009: The Biennial Report on Freshwater Resources (Pacific Institute for Studies in Development, Environment and Security Washington DC 2009) 6. 90 ibid 8±9. 91 The notion of cross-price elasticity demand is relevant to explain the responsiveness of demand toward one good when the price of another good is changed. See R S Pindyck and D L Rubinfeld Microeconomics (6th edn Prentice Hall of India New Delhi 2006) 34. In the case of water, there is no alternative good that demand for water could switch to.

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tackle the effects on hydrological variability. Sadoff and Muller assert that:
Changes in the availability, timing and reliability of rainfall and the water resources that flow from it will have impacts on all water-using sectors. These impacts in turn will affect the broader dynamics of national economies as well as environmental and social needs, particularly in poorer societies. Specifically, since effective water management is important for the achievement of many of the Millennium Development Goals, these impacts could also threaten their achievement and their sustainability once achieved.92

. . . Yet to truly incorporate adaptive management, there needs to be some ``give'' at the individual level as well. One way to achieve this goal is to `regulate' for it.94

From these perspectives it is possible to conclude that water is one of the most vulnerable resources in nature. Its lack of substitutes entails potential conflict among users and its holistic approach requires a balanced allocation among all users. These characteristics are increasingly addressed at the regional and global level. They also need to be considered in the context of international investment arbitration, due to a convergence between environmental sustainability, equitable access to water and economic development through the protection of international investment.

Secure water legal regimes are evolving into adaptive management and regulatory flexibility. Whilst there is the expectation of fierce competition among water users in the coming years,95 the way forward is not yet clear. There is a necessity to approach the increasing uncertainty of water flows through new legal frameworks. So far, there is growing consensus regarding the necessity for more flexible regulatory systems for allocation and reallocation of water rights. In the sphere of international investment, new types of ventures and investment trends are proliferating, such as for instance, joint ventures between the national private sector and the farming sector. As Mann warns: `[E]arly movers are seeking to lock in access to water for agriculture with investments in states perceived to have a surplus of water today'.96 Countries where water resources are traditionally scarce have started to invest in agricultural lands, with leased periods of 50 to 90 years and extension up to 1 million hectares.97 As a consequence, one can expect a rise in demand for water in order to run investors' businesses. In the near future it is also expected that water rights accorded to investors might need to be reallocated or cancelled, due to either prioritization or scarcity. This entails a breach of investment protection obligations under IIAs. For instance, Peru's new Water Act regulating water resources brings concern to the mining sector which fears that giving more power to local governments could endanger mining projects. The new Act does not provide for `grandfather clauses' and adds another `time-consuming' step to the approval process for the disposal of treated water from mining, in the view of the mining sector, of which one project has a US$934 million budget. Government officials perceive that this Act will improve the quality of water management, ensuring efficient and sustainable use of water resources.98 A water licence may not prima facie constitute an `investment' within the meaning of an IIA, but as it is necessary for the development of the business its cancellation may render the main investment activity useless. Some environmental legislation provides for cancellation of water rights under situations of water stress. The Alberta Water Act, for instance, provides for the cancellation of a water licence under s 55(2) when `a significant adverse effect on the aquatic environment occurred, occurs or may occur that was not

9

CONCLUSION: NEW CHALLENGES ± NEW TENSIONS

This article argues that there is a tension between divergent duties emerging from two independent fields of law, the protection of foreign investment and the regulation of water resources, specifically water services. The illustration of this situation through the lens of water services regulation shows an evident direct impact of economic and social regulation on foreign investors, as providers of the service. Despite this evident relationship, investment arbitration appears to disregard issues of global concern, such as the right to water and its importance for human life. The inconsistency and unpredictability of investment arbitration awards that has been illustrated in the cases related to the environment could find an echo in water-related cases. A more blurred relationship is that of obligations of investment protection and water resources management. This article has put forward various perspectives from which to approach water resources. They appear to be crucial to reinforce the argument that water is of a special nature and its management requires a holistic approach. The increasing variability of natural water cycles no longer allows for static water entitlements. This is exacerbated by climate change, which puts additional pressure on water resources. Whilst there is debate about the impact of climate change over availability of water resources, there is much less doubt that variability will not meet historical patterns.93 Newman inquires:
Water users who hold vested water rights in arid regions hold valid property rights, even though they are considerably different than ownership rights to a piece of land. How, indeed, could those rights be made more `flexible?'

92 Sadoff and Muller (n 75) 4. 93 D A Hughes and S J L Mallory `The Importance of Operating Rules and Assessments of Beneficial Use in Water Resource Allocation Policy and Management' (2009) 11 Water Policy 732.

94 J C Newman `Adaptive Management: How Water Law Needs to Change' (2001) 31 Envtl L Rep 11432 (Envtl L Inst) 5. 95 Sadoff and Muller (n 75) 734. 96 C Smaller and H Mann `A Thirst for Distant Lands: Foreign Investment in Agricultural Land and Water' (International Institute for Sustainable Development Foreign Investment for Sustainable Development Program 2009) 5. 97 ibid 6. 98 Dow Jones Commodities via Comex `DJ Peru's New Water Law Causes Concern for Mining Companies' (Lima 23 March 2010), available at http://webcache.googleusercontent.com/search?q=cache:K8AT YrP2YWAJ:news.tradingcharts.com/futures/7/0/137141507.html+Peru% 27s+New+Water+Law+Causes+Concern+For+Mining+Companies& cd=1&hl=en&ct=clnk&gl=uk&client=firefox-a.

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reasonably foreseeable at the time the licence was issued'.99 Should this be the situation ± in the example of the mining company ± a case for arbitration could be raised by the investor against the Government of Canada.100 Cases such as Santa Elena v Costa Rica and Metalclad v Mexico show a not necessarily consistent view on environmental issues, and the risk of extremely high levels of compensation,101 that could potentially discourage the application of the Alberta Water Act. Previous sections have briefly addressed the increasing regard for transnational regulation of global concerns such as environmental sustainability and human development, through the right to water. However,

disregard for such concerns still influences international investment arbitration. This article argues that development of standards of protection can gradually embed principles of water law, internationally discussed and adopted. IWRM as an international policy tool is increasingly accepted and implemented by most developed nations; as such it could be the first step toward an increasing protection of water resources. This constitutes a challenge for investment arbitrators, who perform the application and interpretation of IIAs, and raises the possibility of future disputes best resolved by a more holistic approach that recognizes the special nature of water.

99 Water Act RSA 2000 c. W-3 (Alberta Canada). 100 For a complete insight of the example at hand, see J Cumming, R Froehlich `Nafta Chapter XI and Canada's Environmental Sovereignty: Investment Flows, Article 1110 and Alberta's Water Act' (2007) 65 University of Toronto Faculty of Law Review. 101 The investment arbitration cases raised against Argentina only involve approximately US$19 billion, which affects the wellbeing of millions of people. See Solanes (n 56). THE JOURNAL OF WATER LAW PUBLISHED BY LAWTEXT PUBLISHING LIMITED WWW.LAWTEXT.COM

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