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1 INTRODUCTION the same institutional context'.2 Note, however, that

the provision of water services is also related to
International Investment Agreements (IIAs) have the general water resources management as an integral
primary purpose of protecting and promoting foreign part of its holistic approach for the provision of bulk
investment, which in turn enhances the economic water and the management of waterborne waste.
development of the host country. While under IIAs all
economic activities linked to foreign investment are
equally protected, it appears that arbitral tribunals do 2 WATER SERVICES: ECONOMIC REGULATION
not give due regard to those activities likely to affect AND SOCIAL PERSPECTIVE
environmental sustainability and the right to basic The social perspective of water resources is most
services such as water. It is argued from this perspec- notably embedded in the provision of water services,
tive that the role of investment arbitrators is significant which has raised a number of tensions in the area of
for the development of standards of protection as protection of international investment. The question
these evolve through the legal analysis embedded in of how to tackle the challenge of providing universal
arbitral awards, as does the increasing jurisprudence access to water services and sanitation has long been
in investment arbitration. discussed among international organizations, non-
governmental organizations (NGOs), governments and
This article argues that special consideration needs to private investors. In this context, an important part of
be given to the unique nature of water resources, as the debate concentrates on whether water should be
well as the provision of water services, in order to provided through public or private investment.
meet environmental and human development goals
Currently one billion people lack safe drinking water
such as the Millennium Development Goals (MDGs).
and another two and half billion lack access to basic
Such emphasis is necessary due to current challenges
sanitation.3 With 50 per cent population growth in
around increasing water scarcity in the context of
Latin America and the Caribbean and 100 per cent
stiffer competition for limited hydraulic resources
growth in Africa and Asia over the next 25 years,4
between users in various economic sectors.
significant investment is required, which governments
In this context the core issue examined in this article are not always able to provide. The Camdessus Report
pertains to the tensions that protection of foreign estimates that an extra $10 billion per year5 would be
investment has created in relation to the provision of required to meet the 2015 MDGs, using the most basic
water services and in the field of the environment. In standards of service and technology.6 Private invest-
addition, the article considers the application of ment for the provision of water services currently
foreign investment protection standards to secure amounts to only 11 per cent of total investment.7
long-term economic returns on investment, including However, it is likely to increase in the future due to
water rights as production inputs from naturally new forms of Public-Private Partnerships (PPP).8 Cecilia
variable water flows that require a flexible manage-
ment framework to ensure sustainable development
2 World Water Assessment Programme The United Nations World
and environmental protection. Water Development Report 3: Water in a Changing World (UNESCO
Paris/Earthscan London 2009) 51.
It is important to note that there are substantial differ- 3 United Nations Development Programme (UNDP) `Human Devel-
ences between water resources management and water opment Report 2006: Beyond Scarcity: Power, Poverty and the Global
services regulation. Water resources management goals Water Crisis' (2006) 5.
4 M Camdessus, J Winpenny `Financing Water for All: Report of the
are resource planning, abstraction and water quality.
World Panel on Financing Water Infrastructure' (World Water Council
Water services regulation has parallels with other and Global Water Partnership 2003) 5.
utilities and essential services, with similar infrastruc- 5 In 2003, financing drinking water in developing countries
ture features. Therefore, it would be `misleading to amounted to $13 billion a year (n 4) 3.
discuss resources management and services delivery in 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
1 Contact:; the infrastructure. This, in turn, implies less risk for the private
I thank my supervisors Professor Patricia Wouters and Dr Sarah Hendry operator. See P Marin `Public-Private Partnerships for Urban Water
for their guidance and comments in the preparation of this article. Any Utilities: A Review of Experiences in Developing Countries' (World
mistake or omission remains mine. Bank Washington DC 2009) 8.



Tortajada, Vice President of the Third World Centre for ``bribery'' to protect the interests of those who were
Water Management, estimates that 15 per cent of the the subject of the regulation'.14 This might have been
people in developing countries will have access to the case for a number of investment disputes brought
water and water-related services from private compa- to arbitration after the privatization processes carried
nies by 2020.9 out in the last two decades.
Due to the monopolistic nature of the water utilities The regulatory measures affecting investors' interests
infrastructure, regulation of water services is pivotal are generally linked to the economic regulation of
when provided by private operators. The water network infrastructure, price, investment in expansion
services sector, as well as the telecommunications and access to water services among others. However,
and energy sectors, is dependent on network infra- other regulatory measures are aimed at meeting the
structure, and therefore it is considered a `natural needs and demands of citizens due to social concerns,
monopoly'.10 A particular industry is generally con- such as those related to the right to water, water
sidered to be a natural monopoly `if the production of affordability and cross-subsidization. Griffin explains
a particular good or service by a single firm minimizes that decision making in the water sector is character-
costs'.11 This means that average cost decreases while ized by a higher degree of public involvement:
output increases (up to a certain point), attaining `[P]eople think of water resources as public property.
economies of scale. In some contexts, when a natural They feel entitled to water. They have an opinion about
monopoly is present it might be desirable for reasons it. Because they drink it and know that life isn't possible
of economic efficiency to maintain a monopolistic without it, they can get emotional about water'.15
market structure, as competition of some or many
The next section will address the tensions arising from
companies will bring about productive inefficiencies.
regulatory measures affecting private operators' in-
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 3 KEY ISSUES IN INVESTMENT ARBITRATION
`only then is the value of resources used to supply the
Negotiations of specific agreements for the protection
market minimized'.12 For reasons of profit-maximiza-
of investment were first carried out by the United
tion, a monopolist has an incentive to charge excessive
States with European countries in the nineteen
prices and under-produce, undermining the achieve-
century. These Treaties of Friendship, Commerce and
ment of allocative efficiency. However, with more than
Navigation concentrated on trade relations and aimed
one company producing the same good, productive
at protecting the property of foreign nationals.16 Long
efficiency would be sacrificed. Therefore, in sectors
before this, in 1758, Vattel warned:
such as water services, regulation is crucial in order to
overcome investors' adverse incentives, while not Owing to the binding character of express promises and
diminishing the productive efficiency of the mono- agreements, a wise and prudent Nation will carefully
polistic position. `The principal benchmark for ``just examine and maturely consider a treaty of commerce
and reasonable'' rate levels has been cost of produc- before concluding it, and will take care not to bind itself to
anything contrary to its duties to itself and to others.17
tion, including [. . .] the necessary return to capital.'13
Promotion and protection of foreign direct investment
Regulators are expected to strike a balance between
through IIAs, such as Bilateral Investment Treaties
consumers' and providers' interests, in line with
(BITs) and Free Trade Agreements (FTAs), has acquired
governmental public policy. This task is likely to be
great relevance due to its exponential increase in the
greater for regulators in developing countries, where
last two decades.18 This increase is related to an also
public policy tends to be less stable and decision
increasing number of negotiated IIAs.19 The over-
making more political. The demise of several water
arching purpose of these agreements is the protection
services projects could arguably be attributed to weak
of foreign investment; hence, rights are conferred only
regulatory systems, subject to pressures from compa-
to investors, as opposed to balancing rights and
nies, interest groups and governments. This issue
could be analysed from the `capture theory' perspec-
tive that addresses the impossibility of regulatory 14 A Ogus Regulation: Legal Form and Economic Theory (Clarendon
agencies to meet public interest objectives as they Press Oxford 1994) 57.
appear to be `subverted by pressure, influence, and 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.
9 C Tortajada `Private Versus Public in Water Provision: Encouraging 17 M Vattel Le Droit des Gens ou Principes de la Loi Naturelle (1758),
Case of Sri Lanka' (case study for the Human Development Report as cited by C McLachlan QC and others International Investment
2006). Arbitration: Substantive Principles (1st edn Oxford University Press
10 Note however, that the electricity and telecommunications Oxford 2007).
industries differ from the water industry, in that networks and grids 18 UNCTAD states that by the end of 2008 the total number of BITs
are not shared among the producers of the service. As pointed out by amounted to 2676. See United Nations Conference on Trade and
E M Vinnary `The Economic Regulation of Publicly Owned Water Development (UNCTAD) `Recent Developments in International
Utilities: The Case of Finland' (2006) 14 Utilities Policy 159. Investment Agreements (2008±June 2009)' IIA Monitor No. 3 (2009):
11 W K Viscusi, J M Vernon and J E Harrington Jr Economics of International Investment Agreements (United Nations New York and
Regulation and Antitrust (3rd edn MIT Press Cambridge MA 2001) 337. Geneva 2009) 2.
12 ibid 314. 19 UNCTAD `Investor±State Dispute Settlement and Impact on
13 A E Kahn The Economics of Regulation: Principles and Institutions Investment Rulemaking' (United Nations New York and Geneva
(MIT Press Cambridge MA 1988) 63. 2007) 8.



obligations of foreign investors and host states or A number of disputes around the provision of water
other stakeholders.20 The novelty within such interna- services arose not only due to a regulatory measure
tional agreements is the dispute settlement mechan- affecting an investor's economic returns; termination
ism, where investors can directly bring host states to of concession contracts and reversion of the control
arbitration, should their `property rights' be impaired. over infrastructure have also given rise to investment
This mechanism was put forward by the World Bank in disputes between investors and host states. Some of
1966 and is administered by the International Centre these cases are addressed in the next section.
for the Settlement of Investment Disputes (ICSID).21
The definition of `investment' under international in- 4 INVESTOR-STATE INVESTMENT ARBITRATION
vestment law encompasses a wide range of property OVER REGULATION OF WATER SERVICES
rights; ```every kind of asset'' is normally used as the
leading formula to a non-exhaustive definition of in- The number of international investment arbitration
vestment'.22 Therefore, property rights are those tan- cases in the water services sector has increased in the
gible and intangible rights deemed necessary to the last 20 years, after a flow of foreign investment into
attainment and operation of the investment, eg developing countries. Investors found a niche for
licences for water use, linked to investments in mining, business in the process of privatization of network
oil extraction and energy generation. IIAs aim at infrastructure, supported by the World Bank and other
financial institutions. Telecommunications, energy, oil,
covering a wide range of economic activities, hence
there is a general and almost standardized group of transport and water were transferred to the control
standards of protection, common to most IIAs: a) Non- and administration of investors, under the expectation
expropriation without compensation; b) Fair and of providing more efficient and better quality services,
equitable treatment; c) Full protection and security; but also under the assumption that further investment
d) National treatment; and e) Most-favoured-nation would expand the infrastructure, hence providing
treatment. The scope of each standard is primarily services to a broader sector of citizens. For some of
stated by the agreement and secondarily interpreted the privatized sectors this was the case. On the one
by the arbitrators. hand, telecommunications could be considered a
success of the privatization trend; on the other hand,
The notion of expropriation has also developed over privatization of water services is often regarded as a
time and is currently widely used. The traditional failure. This section looks at three notable disputes
notion of `political risk' adopt encompasses direct over water services.
expropriation, nationalization of assets, forced rene-
gotiations of contracts and harassment of foreign
investors.23 Expropriation has now adopted new forms 4.1 Aguas del Tunari v Bolivia 25
where `[o]wnership is not transferred, but the ``nor- The outcome of the privatization process in Cocha-
mal'' commercial functioning of business operations is bamba, Bolivia proved to be emotional and turbulent.
unexpectedly impaired' generally under the form of In 1999 the Bolivian Government, after a public bidding
governmental regulations. `Regulatory risk'24 can process, granted a concession contract for the provi-
adopt the form of higher environmental standards, sion of water services to Aguas del Tunari (a subsidiary
certain levels of prices for infrastructure, and health, of International Water Limited of the United States) for
security and human development concerns; all these a period of 40 years. The setting of the tariff included
have given rise to a now broader notion of the concept the costs involved in the provision of the services, as
of `property'. well as expected investment in the infrastructure pro-
ject (Proyecto Misicuni), which was in its early phase.
The disproportionate increase in price caused social
20 H Mann `Implications of International Trade and Investment
Agreements for Water and Water Services: Some Responses from
unrest that ended with the expulsion of the company
Other Sources of International Law' (2006), available at http://www.idrc. from the city and the cancellation of the concession
ca/en/ev-102451-201-1-DO_TOPIC.html, 14. contract. An investment dispute against the Govern-
21 The ICSID Convention is a multilateral treaty under the auspices ment of Bolivia was brought by the investor before
of the World Bank. It was opened for signature on 18 March 1965 and
ICSID, claiming US$50 million in compensation.26 The
entered into force on 14 October 1966. `The Convention sought to
remove major impediments to the free international flows of private proceedings did not reach an award due to an active
investment posed by non-commercial risks and the absence of lobby of NGOs advocating for the right to water of the
specialized international methods for investment dispute settlement. citizens of Cochabamba. The Government of Bolivia
ICSID was created by the Convention as an impartial international avoided a detrimental compensation ± assuming
forum providing facilities for the resolution of legal disputes between
eligible parties, through conciliation or arbitration procedures. Re-
arguendo that the arbitral tribunal found a breach of
course to the ICSID facilities is always subject to the parties' consent'. Bolivia's obligations under the BIT ± as Bechtel and
International Centre for the Settlement of Investment Disputes http:// 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
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 25 Aguas del Tunari SA v Republic of Bolivia (ICSID Case No. ARB/02/
Infrastructure Investment: The Effectiveness of International Law 3) (Aguas del Tunari v Bolivia).
Disciplines Versus Sanctions by Global Markets in Reducing the 26 The Democracy Center On-Line `Bechtel VS. Bolivia: The People
Political and Regulatory Risk for Private Infrastructure Investment' Win!!' (2006)
(2000) 34(2) Journal of World Trade 5. 27 S Spronk and C Crespo `Water, Sovereignty and Social: Investment
24 ibid. Treaties and the Struggles against Multinational Water Companies in



the population when basic rights are at stake; it also fully favoured Tanzania, as the tribunal concentrated
shows the influence and participation of NGOs in the its analysis especially on the country's obligation of
international investment arena. investment protection under the BIT, to conclude
solely whether there was expropriation of investor's
assets or not. Tribunals still appear far from consider-
4.2 Biwater v Tanzania 28
ing the vital importance of water services among the
In 2003 Tanzania started a process of privatization of its population of the host country; therefore, such
water utility infrastructure with funding from the World analysis is also absent in the arbitral award.
Bank and other financial institutions. US$140 million
was intended to repair, expand and update the Dar es
4.3 Vivendi v Argentina 32
Salaam water and sanitation systems. Biwater Gauff, in-
corporated as City Water Services Limited, was granted In 1995, during the Argentinean privatization process,
a 40-year concession for the provision of water services, Vivendi Universal from France and Aguas de Aconquija
as the only bidder in the process. To this end, it signed from Argentina signed a 30-year concession contract
three contracts with the Dar es Salaam Water and with the Province of Tucuman for the provision of
Sewerage Authority (DAWASA). City Water's project water services and sewage. The contract provided for
eventually failed, due to difficulties in meeting its investors' obligation to improve the quality of the
contractual obligations regarding billing and collection services, for which it required substantial investment.
of tariffs from consumers. Various measures were adop- The high level of the tariffs forced the newly elected
ted by DAWASA and Tanzanian government officials in government of Tucuman to ask the investors for a tariff
order to recover the control of the water services reduction. Different governmental institutions con-
company, including the cancellation of the contract, tinuously urged them to reduce tariffs, according to
the occupation of City Water's facilities, taking over the the provisions of the contract. Attempts to renegotiate
management of the company and deportation of the concession contract in order to lower the tariffs
senior managers.29 The tribunal determined that the also failed.
investor had performed poor management of the
The situation was exacerbated by two incidents of
utility as from the bidding process and had failed to
turbidity in the drinking water that led the Ministry of
meet some of its contractual obligations. It did find the
Health to warn the citizens of Tucuman of dangers to
Tanzanian government measures to be expropriatory,
their health from diseases such as cholera, typhoid and
but it did not grant any compensation in favour of the
hepatitis. Moreover, the government of Tucuman
investor since the economic value of the utility was nil.
encouraged consumers not to pay for the services.
The tribunal concluded that by the time of the
wrongful acts by Tanzania the value of the assets was Finally, the contract was terminated in August 1997 but
already zero and that termination of the contract was the investors were required to continue providing the
inevitable in any event.30 Therefore, according to the services for almost another year. The case was submit-
tribunal there was no causation between the wrongful ted before ICSID in two opportunities, since the first
acts of Tanzania and loss and damages suffered by the decision was annulled in 2003. The investors claimed
company, as the defendant was not the cause of City that Argentina had breached the fair and equitable
Water's economic failure. In this vein, Peter Muchlinski treatment as well as the non-expropriation standards
asserts: provided for under the BIT between Argentina and
France. The tribunal's decision conceded that Argen-
Any losses that subsequently arise out of an inaccurate
risk assessment will be borne by the investor. They will not tina had violated its obligations under the BIT and
be recoverable under the terms of the investment treaty. granted the claimants US$105 million compensation.
[. . . fair and equitable treatment . . .] is also a principle that Regarding the breach of the non-expropriation stan-
is consistent with good business practice, as it requires the
dard, the tribunal found inspiration in Santa Elena v
investor to take responsibility for the normal commercial
risk associated with the investment rather than to find a
Costa Rica 33 ± which will be addressed below ± and
source of insurance in the host country's obligations under contended that public interest does not alter the
the applicable investment agreement. The development of expropriatory measure for which compensation is
such a principle is justified by the view that IIAs are not due.34 The tribunal approached the issue from the
insurance policies against bad business judgments.31 perspective of the `sole effects' doctrine and con-
tended that it is the effect of the measure and not the
Whilst the award was evidently unfavourable to
intent of the government that is the determining factor
Biwater, arguably it could not be concluded that it
for the violation of the non-expropriation standard.35
Schreiber states that to date no host state has yet
Cochabamba and El Alto, Bolivia' (2008) 1 Law, Social Justice & Global invoked the compliance of human rights obligations to
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). 32 CompanÄõÂa de Aguas del Aconquija SA and Vivendi Universal SA v
29 A K Bjorklund `ICSID Tribunal Finds Tanzania to Have Violated Argentine Republic (ICSID Case No. ARB/97/3) (Award: 20 August 2007)
Bilateral Investment Treaty but Declines to Award Any Damages' (2008) (Vivendi v Argentina).
12(27) ASIL Insights. 33 CompanÄia del Desarrollo de Santa Elena SA v Republic of Costa
30 Biwater Gauff v Tanzania (n 28) para 799. Rica (ICSID Case No. ARB/96/1) (Award: 17 February 2000 and Rectifi-
31 P Muchlinski ```Caveat Investor''? The Relevance of the Conduct of cation of Award of 8 June 2000) (Santa Elena v Costa Rica).
the Investor under the Fair and Equitable Treatment Standard' (2005) 55 34 Vivendi v Argentina (n 32) para 7.5.21.
International and Comparative Law Quarterly 542. 35 ibid para 2.5.20.



justify a regulatory measure under dispute: `Instead, States to prevent air pollution. However, in the long
existing jurisprudence is limited to what tribunals have run, the additive turned out to be an environmental
reasoned based upon investor claims, which has so far threat to ground and drinking water due to its highly
favored investors' rights'.36 soluble characteristics. This would have an effect on
the availability of clean water during drought years in
Whilst a body of precedent cannot be expected in
California. The case was brought before ICSID under
investment arbitration law, evolution of standards of
Chapter XI of the North American Free Trade Agree-
protection and a consistent approach toward the holi-
ment (NAFTA),39 where the arbitral tribunal rejected
stic nature of water resources may well be expected in
the claim against the United States for expropriation.
the coming years. This would constitute a further step
In doing so, it adopted a `police powers'40 approach to
in the analysis of water-related cases, which is
justify the adoption of a regulation for public
paramount to meet the MDGs as well as the challenges
purposes.41 The tribunal stated as follows:
of increasing variability of water resources and climate
change. `[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
5 APPLICATION AND INTERPRETATION OF is not deemed expropriatory and compensable.42
However, the approach of a tribunal could differ sub-
stantially 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
As seen above, the regulation of water services aiming an Ecological Decree declaring a Natural Area for the
at the realization of the right to water could hinder protection of rare cactus. The Natural Area encom-
host states' prerogative to regulate. The issue of passed the area of the landfill, granted to Metalclad for
regulatory risk was addressed by Orr et al: `[It] arises the operation of hazardous waste. Metalclad claimed
when a change in law or regulation increases the costs that it was prevented from operating in the landfill.
of operating a business, reduces the attractiveness of Regardless of the acquiescence of governmental
investment and/or changes the competitive landscape. authorities they were still denied a permit by the
Change to the regulatory regime around water can be Municipality of Guadalcazar. In addition, Metalclad
one such risk'.37 Similar tensions can be seen between relied on the Ecological Decree as an additional
environmental regulation and the protection of for- element in its claim of expropriation under Chapter
eign investment, from which some parallels can be XI of NAFTA, arguing that it effectively and perma-
drawn in cases related specifically to water resources. nently precluded the operation of the landfill.44 In this
Development of environmental standards, as well as case the arbitral tribunal found the regulatory measure
adoption of adaptive measures toward greater envir- expropriatory, stating there was no need to decide or
onmental sustainability do not only concern develop- consider the motivation of the Ecological Decree,45
ing countries; they also affect developed countries. thereby adopting the `sole effects' doctrine.46
A first source of potential tension is between secure These cases portray two diverse and conflicting
rights for investors against adaptive and flexible regu- approaches toward environmental protection. Under
lation for water resources and services. The former NAFTA, the United States and Mexico were under
demands a static legal environment, where secure obligation to protect investors' property rights accord-
property rights are guaranteed. This situation conflicts ing to the treaty provisions, so that was the point of
with the concept of regulatory flexibility required in
water management. This tension, which reflects a deep-
39 The North American Free Trade Agreement between the Govern-
rooted conflict between public and private interests, ment of Canada, the Government of the United Mexican States and
requires investment arbitration to evolve toward the the Government of the United States of America was signed at Ottawa,
recognition that environmental sustainability and on the 11th day and the 17th day of December 1992, Mexico, DF, on the
water services are crucial for human development. In 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
Methanex Corporation v the United States of Amer-
January 1994.
ica 38 the state of California adopted a regulation 40 The `police powers' doctrine gives weight to the purpose and the
prohibiting the use of the gasoline additive MTBE, circumstances of the governmental action.
which was originally approved and used in the United 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
36 W Schreiber `Realizing the Right to Water in International appeared to be the United States' argument that the police powers
Investment and Law: An Interdisciplinary Approach to BIT obligations' applied to health measures but may not have extended to environ-
(2008) 48 Natural Resources Journal 466. See Tecnicas Medioambien- mental measures'. See H Mann `The Final Decision in Methanex v.
tales Tecmed v United Mexican States (Tecmed v Mexico) (ICSID Case United States: Some New Wine in Some New Bottles' (International
No ARB(AF)/00/2) (Award: 29 May 2003) para 116; Santa Elena v Costa Institute for Sustainable Development 2005) 5.
Rica (n 33) para 72. 42 See Methanex v United States (n 38) Final Award of the Tribunal on
37 S Orr A Cartwright and D Tickner `Understanding Water Risks: A Jurisdiction and Merits 2005 Part IVD p 4.
Primer on the Consequences of Water Scarcity for Government and 43 Metalclad Corporation v United Mexican States (Metalclad v
Business' (World Wildlife Fund 2009) 31. Mexico) (ICSID Case No. ARB(AF)/97/1) (Final Award: 30 August 2000).
38 Methanex Corporation v United States of America (Methanex v 44 ibid.
United States) Arbitration under Chapter 11 of the North American 45 ibid para 111.
Free Trade Agreement and the UNCITRAL Arbitration Rules (Award: 46 The `sole effects' doctrine concentrates on the effect that the
August 2005). regulatory measure has had on the investor.



departure for the analysis undertaken in the cases at As opposed to the Santa Elena case, some arbitral tri-
hand. However, the approach adopted by each bunals have considered that regulatory interventions
tribunal, ie the `sole effects' doctrine versus the `police do not amount to expropriation. In Methanex v United
powers' doctrine, undermined the predictability of the States and Saluka v Czech Republic,52 arbitrators did
outcome of the disputes and that whilst the outcome not find that a regulatory measure adopted in a non-
could still be different, what is needed essentially is discriminatory manner and according to due process
the consistent application of a single approach. amounted to expropriation. In Feldman v United
States 53 the tribunal noted that:
A second source of potential tension relates to invest-
ment arbitrators' ± potential ± disregard for issues of [G]overnments must be free to act in the broader public
global concern such as environmental sustainability or interest through protection of the environment, new or
the attainment of the MDGs, where water resources modified tax regimes, the granting or withdrawal of
may well be the subject matter of the dispute. When government subsidies, reductions or increases in tariff
levels, imposition of zoning restrictions and the like.
an arbitral tribunal is confronted by a water-related
Reasonable governmental regulation of this type cannot
investment dispute, under an IIA, it will determine be achieved if any business that is adversely affected may
whether the host state has provided adequate protec- seek compensation, and it is safe to say that customary
tion to the investor's property rights. If not, it may international law recognizes this.54
grant compensation to the investor. The risk of dis-
regarding other societal values is becoming apparent The fourth and final potential tension between regu-
under international investment arbitration. In this vein, lation of water resources and investment protection
Stewart argues that `global regulatory bodies disregard lies in the non-binding nature of arbitral awards.
or give inadequate consideration to a range of Arguably this undermines the reliance of host states
important social, economic, cultural, environmental as well as investors on such a mechanism of dispute
and other interests and values [. . .] impacted by their resolution. The fear of an unfavourable award would
decisions'.47 In Santa Elena v Costa Rica,48 the arbitral deter the regulatory prerogative of states and may com-
tribunal stated as follows: promise the economic and human development of the
country.55 As Solanes explains: `The interpretation of
Expropriatory environmental measures ± no matter how such guarantees [standards of protection] has created
laudable and beneficial to society as a whole ± are, in this a gap between national legislation on public interest
respect, similar to any other expropriatory measures that a
issues and the decisions of arbitration courts'.56
state may take in order to implement its policies: where
property is expropriated, even for environmental pur- In October 1999, the American corporation Sun Belt
poses, whether domestic or international, the state's Water Inc filed a Notice of Claim and Demand for
obligation to pay compensation remains.49 Arbitration against the Government of Canada, under
Santa Elena does not necessarily represent a unique Chapter 11 of NAFTA. The claimant argued that the
stance toward the protection of the environment in Government of Canada had imposed a national ban on
investment arbitration, but it re-inforces the argument the export of fresh water by marine tanker from the
that arbitrators do not give especial considerations to Great Lakes that had reduced the worldwide supply of
higher societal values. fresh water for export. It also requested the restoration
of the fresh water export licensing arrangements for
The decision in Santa Elena also illustrates a third bulk shipment by marine tanker. Temporary lost
source of potential tension between investors and host business opportunity costs were claimed in the order
states, namely `compensatory regulation'. What consti- of US$468 million that could rise to a loss of $1.5
tutes a `normal government regulation' or an `imper- billion.57 The case did not proceed to arbitration, due
missible indirect expropriation' is still the subject of to a settlement between the parties. The amount
discussion not only at the heart of the international agreed by the parties remains unknown. However, it
investment arbitration sphere, but also among aca-
demics, practitioners and international organiza-
tions.50 According to Newcombe:
52 Saluka Investments BV (the Netherlands) v the Czech Republic
The thorny question is: what is a legitimate and bona fide Arbitration under UNCITRAL Arbitration Rules 1976 (Partial Award: 17
exercise of state police powers that justifies a complete March 2006) para 262.
53 Marvin Roy Feldman Karpa v United Mexican States (ICSID Case
deprivation of property with no corresponding obligation
No. ARB(AF)/99/1) (Final Award: 16 December 2002).
to pay compensation? International law does not provide a
54 Feldman v United States (n 53) para 103.
clear answer to this question.51 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
47 R B Stewart Accountability and the Discontents of Globalization: environments for investment, linked to legitimacy of governments and
US and EU Models for Regulatory Governance (Paper presented to the policies, are relevant for the success of foreign investment, and play a
Hauser Colloquium on Globalization and its Discontents September pivotal role in the attraction of international investment. It has been
2006), available at alleged that countries willing to import foreign capital have improved
speakers_papers.html, 5. their governance mechanism and legal systems greatly, due to the
48 Santa Elena v Costa Rica (n 33). prospective benefits of foreign investment.
49 ibid para 72. 56 M Solanes `Water Services and International Investment Agree-
50 OECD Directorate for Financial and Enterprise Affairs ```Indirect ments' in C Ringler, A K Biswas and S Cline (eds) Global Change:
Expropriation'' and the ``Right to Regulate'' in International Investment Impacts on Water and Food Security (Springer Berlin/Heidelberg 2010)
Law' (Working Papers on International Investment No 2004/4). 210.
51 For a discussion, see A Newcombe `The Boundaries of Regulatory 57 Sun Belt Water Inc v Her Majesty the Queen Notice of Claim and
Expropriation in International Law' (2005) 20(1) ICSID Review. Demand for Arbitration 12 October 1999.



raises concerns over the pressure put on governments common reasoning, methodology and substantive as
as to whether they could defend their case before an well as procedural rules, as opposed to commercial
investment tribunal, or whether a settlement without arbitration, where decisions are formulated for private
addressing the merits would be a lesser evil. parties. Investment arbitration is moving towards
consolidating jurisprudence.62
The ongoing discussion regarding the necessity of con-
sistency and predictability in international investment Recent examples of inconsistent awards originate in
arbitration touches upon issues of public interest such the application of the United States±Argentine Repub-
as environmental sustainability and human rights. The lic BIT,63 in which arbitrators arrived at `diametrically
next section addresses the issues arising from incon- opposed' decisions regarding the same issues `even
sistent interpretation and application of IIAs. 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,
The absence of binding precedent in investment as they justify the measure in some cases and find it
arbitration results in inconsistent application, inter- unlawful in others.
pretation and enforcement of IIAs and uncertainty for
CMS v Argentinean Republic,65 Enron v Argentinean Re-
the parties. However, there is a current view that
public 66 and LG&E v Argentinean Republic 67 brought
investment adjudication increasingly gives shape to a
claims before three different tribunals against the same
body of jurisprudence, along with the development of
regulatory measure, an Emergency Law converting US
standards of protection embedded in IIAs.58 Secondly,
dollars tariffs into pesos. All companies shared the
it illustrates the dangers of inconsistent approaches in
same nationality; hence the same BIT (United States±
this area of law. Finally, it attempts to highlight the role
Argentina) was applied. Notwithstanding, the tribunals
of arbitrators shaping such standards of protection as
approached the issue from different perspectives, and
this role becomes decisive for the attainment of
the outcomes were also different.68 The significance of
environmental sustainability and universal access to
the conflicting methodologies chosen by the arbitra-
tors to interpret the relationship between the opera-
The nature of investment arbitration requires a case by tive treaty exception and relevant customary law (in
case basis analysis as well as consideration of the this case the state of necessity)69 played a decisive role
specific merits of each case. However, an approach of in the fate of the investors and the host state.
this kind presents some risks due to the different
Within the sphere of environmental regulation, Metha-
assumptions adopted by adjudicators to arrive at a
nex v United States 70 and Metalclad v Mexico 71 consti-
conclusion. Therefore, even when a measure is iden-
tute examples of divergent approaches to what
tical, under the same IIA and all circumstances alike,
appears to be the same regulatory measure.
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, 62 T Waelde `Separate Opinion in the Arbitration under Chapter XI
such as management of water resources and regula- of the NAFTA and the UNCITRAL Arbitration Rules: Thunderbird/
tion of water services. Mexico' Arbitral Award in the NAFTA arbitration under the UNCITRAL
Arbitration Rules Thunderbird v Mexico (n 61) para 15.
Currently, there is growing consideration for each 63 Treaty Between the United States of America and the Argentine
other's decisions among arbitrators, which has led Republic Concerning the Reciprocal Encouragement and Protection of
Investment, with Protocol, signed at Washington on 14 November
scholars to suggest that development of standards of
1991; and Amendment to the Protocol effected by exchange of notes at
protection takes place in a casuistic manner.60 Waelde Buenos Aires on 24 August and 6 November 1992.
has addressed the problem of consistency in his 64 A K Bjorklund `Emergency Exceptions: State of Necessity and
dissenting opinion in Thunderbird v Mexico,61 assert- Force Majeure' in P Muchlinski O Federico and C Schreuer (eds) The
ing that international investment jurisprudence is pos- Oxford Handbook of International Investment Law (Oxford University
Press New York 2008). See also CMS Gas Transmission Company v
sibly emerging through a group of awards that share 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)
58 See R Dolzer and F Bloch `Indirect Expropriation: Conceptual (Enron v Argentina) (ICSID Case No. ARB/01/3) (Award: May 2007); and
Realignments?' (2003) 5 International Law Forum du Droit Interna- Sempra Energy International v Argentine Republic (Sempra v Argenti-
tional; A K Bjorklund `Investment Treaty Arbitral Decisions as na) (ICSID Case No. ARB/02/16), (Award: September 2007) all of them
Jurisprudence Constante' UC Davis Legal Studies Research Paper 158 under the United States±Argentina BIT.
(SSRN eLibrary 2008). 65 CMS v Argentina (n 64).
59 A van Aaken `Fragmentation of International Law: The Case of 66 Enron v Argentina (n 64).
International Investment Protection' (2008) XVII Finnish Yearbook of 67 LG&E Energy Corp, LG&E Capital Corp and LG&E International Inc
International Law (U of St Gallen Law and Economics Working Paper v Argentine Republic (ICSID Case No. ARB/02/1) (Award: 25 July 2007).
No 2008-1). 68 See Bjorklund (n 64).
60 Dolzer and Bloch (n 58). 69 J Kurtz `Adjudging the Exceptional at International Law: Security,
61 International Thunderbird Gaming Corporation v The United Public Order and Financial Crisis' (The Jean Monnet Working Paper
Mexican States Arbitration under Chapter Eleven of the North Series 06/08 2008) 13.
American Free Trade Agreement (Award: 26 January 2006) (Thunderbird 70 Methanex v United States (n 38).
v Mexico). 71 Metalclad v Mexico (n 43).



Specific concerns, such as the environment, public have generally been allocated according to expec-
health and human development can either respond to ted historical availability75 and the particularities of
purely national initiatives or be part of broader each country, very much in line with current conven-
transnational regulation, adopted at the heart of tional property regimes and prima facie consistent
international initiatives. Water resources and services with investment protection under IIAs. Nonetheless,
certainly raise such concerns. In the words of Conca, water is the result of a hydrological cycle that is
`water is indeed subject to governance that is increas- variable and increasingly unpredictable, which in turn
ingly, though certainly not exclusively, global'.72 affects the amount of water flowing into watersheds.
Therefore, legal regimes for water rights evolved differ-
ently from other major regimes of general property
and do not wholly follow the security standard men-
tioned above. Thus, for reasons of public interest and
interrelated common use, water rights regimes cannot
Traditional regulation of water resources is evolving usually guarantee complete property rights.76 Further-
toward more flexible approaches to water manage- more, adaptive management to competing uses due to
ment in order to tackle current and future challenges increasing demand, plus additional pressures on water,
around water stress and climate change. This section such as population growth, economic development, mi-
addresses potential conflicts arising from adaptive and gration and climate change, requires prioritization of
flexible regulation of water resources with protection water uses. This, in turn, involves the necessity of a
of international investment obligations, under inter- more flexible approach toward allocation and realloca-
national investment law. tion of water rights. Sadoff and Muller suggest that, due
to climate change, it will not be possible to expect
As law evolves, expands and specializes, overall nor-
water to meet the same historical patterns; therefore,
mative coherence becomes elusive and the likelihood
`past rights and mechanisms may no longer be viable'.77
of potential conflicts linked to interplay between dif-
ferent areas of law increases. This is the case in areas Integrated Water Resources Management (IWRM) has
such as water law and international investment law. On become an internationally recognized policy tool. It
the one hand, national governments generally adopt a has been at the top of the global agenda since 1992
holistic approach to the management and regulation when the International Conference on Water and the
of water resources and water services. On the other Environment (ICWE) proposed four general guiding
hand, international investment law aims at the protec- principles for the management of water resources:
tion of foreign investment through stable and secure
1) fresh water is a finite and vulnerable resource, essential
property rights, which constitute an international to sustain life, development and the environment; 2) water
obligation for host countries. Munoz argues that both development and management should be based on a
obligations constitute two divergent duties: a) foreign participatory approach, involving users, planners and
investment protection may undermine the regulation policy-makers at all levels; 3) women play a central part
of water resources (management and services); and b) in the provision, management and safeguarding of water;
regulation of water resources could be a potential and 4) water has an economic value in all its competing
factor of foreign investment expropriation.73 uses and should be recognized as an economic good.78

Water law aims at implementing principles of water IWRM has been further developed through `Agenda
resources management at the local level, taking into 21',79 the International Conference on Freshwaters80
consideration the needs of different users for pur- and the Johannesburg World Summit on Sustainable
poses of allocation of water rights. Until recently, the Development,81 among others.
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. How- `Possible Contents of and Reasons for Water Law' in D A Caponera and
ever, new types of disputes are likely to arise when M Nanni (eds) Principles of Water Law and Administration: National
prioritization, allocation and reallocation among com- and International (Taylor & Francis London 2007) 145; S Hodgson
Modern Water Rights. Theory and Practice (Development Law Service
peting users are deemed necessary to cope with
FAO Legal Office Food and Agriculture Organization of the United
hydrological variability and water scarcity issues. This Nations Rome 2006).
means that at the national level governments may 75 C W Sadoff and M Muller `Perspectives on Water and Climate
require adaptive and prompt regulatory flexibility; Change Adaptation. Better Water Resources Management ± Greater
whereas at the international level investors' enjoyment Resilience Today, More Effective Adaptation Tomorrow' (Global Water
Partnership Stockholm 2009) 11.
of their property rights requires certainty and security. 76 See Tarlock (n 74) 121±2.
In the past, traditional water legal regimes aimed at 77 Sadoff and Muller (n 75).
78 Dublin Statement on Water and Sustainable Development (ICWE
creating a secure environment for water rights,74 which 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)
72 K Conca Governing Water: Contentious Transnational Politics and UN Doc A./Conf.151/26/Rev.1 (United Nations New York 1993) at 288±9.
Global Institutions Building (MIT Press Cambridge MA 2005) 5. 80 International Conference on Freshwater (Bonn Germany 3±7
73 H A Munoz `La AdministracioÂn Del Agua Y La InversioÂn Extranjera December 2001).
Directa ¿CoÂmo Se Relacionan?' in Universidad de Costa Rica (UCR) 81 Plan of Implementation of the World Summit on Sustainable
(ed) Estudios En Homenaje Al Dr. Rafael GonzaÂlez Ballar (Isolma SA Development, Report of the World Summit on Sustainable Develop-
San Jose 2009) 4, 12. ment (Johannesburg South Africa August 26 September 4 2002) UN
74 See D A Tarlock `National Water Law: The Foundations of Sustain- Doc. A/Conf.199/20 at 6, reprinted at http://www.johannesburgsummit.
able Water Use' (2004) 15 Journal of Water Law 121; D A Caponera org/html/documents/documents.html.



Competition among water users is likely to be exacer- water sustains life, effective management of water
bated due to increasing water demand and climate resources demands a holistic approach, linking social
change. Industry and services sectors have started to and economic development with protection of natural
adopt an active role toward the management of water ecosystems. Effective management links land and water
uses across the whole of a catchment area or groundwater
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: The economic value of water resources was recog-
nized in the fourth principle of the Dublin Statement:
[T]he similarities between Coca-Cola and BP end, for the
question of water is far more important to Coca-Cola than Water has an economic value in all its competing uses and
the issue of climate change is to BP. That is because if oil should be recognized as an economic good ± Within this
and gas run out, or are deemed too dirty to use one day, principle, it is vital to recognize first the basic right of all
BP could still peddle ethanol or hydrogen fuel; it is, in the human beings to have access to clean water and sanita-
end, an energy company. Coca-Cola, on the other hand, tion at an affordable price. Past failure to recognize the
simply would not exist without water. So while BP may yet economic value of water has led to wasteful and
see life beyond petroleum, Coca-Cola will never get environmentally damaging uses of the resource. Managing
Beyond Water.82 water as an economic good is an important way of
achieving efficient and equitable use, and of encouraging
In this vein, the 2030 Water Resources Group published conservation and protection of water resources.87
`Charting Our Water Future: Economic Frameworks to
Inform Decision-making'83 aimed at proposing an From an economic perspective, national authorities are
integrated strategy to face the challenges of water confronted with numerous trade-offs, as they are called
scarcity and dialogue among stakeholders. The group to apportion water for irrigation purposes and food
focused on technical issues and cost reducing strate- production, energy generation, provision of drinking
gies to tackle problems around water resources. Big water and industries. In addition, water is needed to
global players such as Coca-Cola, Nestle and New protect environmental flows as well as to guarantee
Holland Agriculture were part of this group, which the sustainability of future generations.88 Water must
suggests an increasing will to cooperate rather than not only be considered as a production input subject
resorting to traditional methods of investment protec- to increasing demand from a quantitative perspective,
tion such as international investment arbitration. but available water resources must also be considered
Environmental regulation has been subject to incon- from a qualitative viewpoint as an environmental
sistent arbitral decisions, damaging the predictability medium affected by pollution, which makes water
and security of the mechanism. This imposes a high unusable or requires extensive treatment or dilution.89
level of risk on investors as well as host states in the As opposed to oil, gas and coal, water has no possible
water resources sector. substitutes at present. Therefore, if all uses of water
were ± hypothetically ± priced, water's price elasticity
8 THE UNIQUE NATURE OF WATER demand would be virtually inelastic, which means that
RESOURCES: FROM DIVERSE PERSPECTIVES users would be willing to pay any price for water as
there is no alternative source they could switch to
This section contends that water has a unique and indi- when water prices raise. Gleick argues that the `ulti-
visible nature. To justify this nature, it can be seen mate water backstop is still water, from an essentially
through different lenses. While it meets various needs, unlimited source'.90 Therefore, arguably there are no
it is also subject to competing uses, leading to tension other sources that could `backstop' water prices
among them. The finite quantity and non-substitut- (cross-price elasticity demand).91 In contrast, alter-
ability of water resources results in competition among native sources of energy can backstop oil prices.
societal uses in various sectors, whilst hydrological Whilst rises in oil prices are expected due to depletion
variability, especially in the context of climate change, of fossil fuels, rises in water prices constitute an
implies a minimal level of certainty for water users. extremely sensitive issue, given the highly social
From an environmental perspective, water is a finite component of water.
and vulnerable resource.84 Available fresh water Climate change is increasingly addressed as a new
resources for common consumption amount to only driver for water stress. Its impacts are more apparent
1 per cent of water present on the planet. Whilst the and regulatory measures are deemed necessary to
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 86 Dublin Statement (n 78).
87 ibid.
rooted in the first principle of the Dublin Statement: 88 Griffin (n 15) ch 2.
Fresh water is a finite and vulnerable resource, essential to 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
sustain life, development and the environment ± Since
Freshwater Resources (Pacific Institute for Studies in Development,
Environment and Security Washington DC 2009) 6.
90 ibid 8±9.
82 The Economist `Coca-Cola in Hot Water: The World's Biggest 91 The notion of cross-price elasticity demand is relevant to explain
Drinks Firm Tries to Fend off its Green Critics' (6 October 2005). the responsiveness of demand toward one good when the price of
83 The 2030 Water Resources Group `Charting Our Water Future: another good is changed. See R S Pindyck and D L Rubinfeld
Economic Frameworks to Inform Decision-making' (2009). Microeconomics (6th edn Prentice Hall of India New Delhi 2006) 34.
84 Dublin Statement (n 78). In the case of water, there is no alternative good that demand for water
85 UNDP (n 3). could switch to.



tackle the effects on hydrological variability. Sadoff . . . Yet to truly incorporate adaptive management, there
and Muller assert that: needs to be some ``give'' at the individual level as well.
One way to achieve this goal is to `regulate' for it.94
Changes in the availability, timing and reliability of rainfall
and the water resources that flow from it will have impacts Secure water legal regimes are evolving into adaptive
on all water-using sectors. These impacts in turn will affect management and regulatory flexibility. Whilst there is
the broader dynamics of national economies as well as the expectation of fierce competition among water
environmental and social needs, particularly in poorer users in the coming years,95 the way forward is not yet
societies. Specifically, since effective water management is clear. There is a necessity to approach the increasing
important for the achievement of many of the Millennium uncertainty of water flows through new legal frame-
Development Goals, these impacts could also threaten
works. So far, there is growing consensus regarding
their achievement and their sustainability once achieved.92
the necessity for more flexible regulatory systems for
From these perspectives it is possible to conclude that allocation and reallocation of water rights.
water is one of the most vulnerable resources in
In the sphere of international investment, new types of
nature. Its lack of substitutes entails potential conflict
ventures and investment trends are proliferating, such
among users and its holistic approach requires a
as for instance, joint ventures between the national
balanced allocation among all users. These character-
private sector and the farming sector. As Mann warns:
istics are increasingly addressed at the regional and
`[E]arly movers are seeking to lock in access to water
global level. They also need to be considered in the
for agriculture with investments in states perceived to
context of international investment arbitration, due to
have a surplus of water today'.96 Countries where water
a convergence between environmental sustainability,
resources are traditionally scarce have started to invest
equitable access to water and economic development
in agricultural lands, with leased periods of 50 to 90
through the protection of international investment.
years and extension up to 1 million hectares.97 As a con-
sequence, one can expect a rise in demand for water in
9 CONCLUSION: NEW CHALLENGES ± order to run investors' businesses. In the near future it
NEW TENSIONS is also expected that water rights accorded to investors
might need to be reallocated or cancelled, due to
This article argues that there is a tension between
either prioritization or scarcity. This entails a breach of
divergent duties emerging from two independent fields
investment protection obligations under IIAs. For in-
of law, the protection of foreign investment and the
stance, Peru's new Water Act regulating water re-
regulation of water resources, specifically water ser-
sources brings concern to the mining sector which
vices. The illustration of this situation through the lens
fears that giving more power to local governments
of water services regulation shows an evident direct
could endanger mining projects. The new Act does not
impact of economic and social regulation on foreign
provide for `grandfather clauses' and adds another
investors, as providers of the service. Despite this evi-
`time-consuming' step to the approval process for the
dent relationship, investment arbitration appears to
disposal of treated water from mining, in the view of
disregard issues of global concern, such as the right to
the mining sector, of which one project has a US$934
water and its importance for human life. The incon-
million budget. Government officials perceive that
sistency and unpredictability of investment arbitration
this Act will improve the quality of water manage-
awards that has been illustrated in the cases related to
ment, ensuring efficient and sustainable use of water
the environment could find an echo in water-related
A water licence may not prima facie constitute an
A more blurred relationship is that of obligations of
`investment' within the meaning of an IIA, but as it is
investment protection and water resources manage-
necessary for the development of the business its
ment. This article has put forward various perspectives
cancellation may render the main investment activity
from which to approach water resources. They appear
useless. Some environmental legislation provides for
to be crucial to reinforce the argument that water is of
cancellation of water rights under situations of water
a special nature and its management requires a holistic
stress. The Alberta Water Act, for instance, provides for
approach. The increasing variability of natural water
the cancellation of a water licence under s 55(2) when
cycles no longer allows for static water entitlements.
`a significant adverse effect on the aquatic environ-
This is exacerbated by climate change, which puts
ment occurred, occurs or may occur that was not
additional pressure on water resources. Whilst there is
debate about the impact of climate change over avail-
ability of water resources, there is much less doubt
that variability will not meet historical patterns.93 94 J C Newman `Adaptive Management: How Water Law Needs to
Change' (2001) 31 Envtl L Rep 11432 (Envtl L Inst) 5.
Newman inquires: 95 Sadoff and Muller (n 75) 734.
Water users who hold vested water rights in arid regions 96 C Smaller and H Mann `A Thirst for Distant Lands: Foreign
Investment in Agricultural Land and Water' (International Institute for
hold valid property rights, even though they are consider-
Sustainable Development Foreign Investment for Sustainable Devel-
ably different than ownership rights to a piece of land. opment Program 2009) 5.
How, indeed, could those rights be made more `flexible?' 97 ibid 6.
98 Dow Jones Commodities via Comex `DJ Peru's New Water Law
Causes Concern for Mining Companies' (Lima 23 March 2010), avail-
92 Sadoff and Muller (n 75) 4. able at
93 D A Hughes and S J L Mallory `The Importance of Operating Rules
and Assessments of Beneficial Use in Water Resource Allocation Policy 27s+New+Water+Law+Causes+Concern+For+Mining+Companies&
and Management' (2009) 11 Water Policy 732. cd=1&hl=en&ct=clnk&gl=uk&client=firefox-a.



reasonably foreseeable at the time the licence was disregard for such concerns still influences interna-
issued'.99 Should this be the situation ± in the ex- tional investment arbitration.
ample of the mining company ± a case for arbitration
This article argues that development of standards of
could be raised by the investor against the Govern-
protection can gradually embed principles of water
ment of Canada.100 Cases such as Santa Elena v Costa
law, internationally discussed and adopted. IWRM as
Rica and Metalclad v Mexico show a not necessarily
an international policy tool is increasingly accepted
consistent view on environmental issues, and the risk
and implemented by most developed nations; as such
of extremely high levels of compensation,101 that could
it could be the first step toward an increasing
potentially discourage the application of the Alberta
protection of water resources. This constitutes a
Water Act.
challenge for investment arbitrators, who perform
Previous sections have briefly addressed the increasing the application and interpretation of IIAs, and raises
regard for transnational regulation of global concerns the possibility of future disputes best resolved by a
such as environmental sustainability and human more holistic approach that recognizes the special
development, through the right to water. However, 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 Sover-
eignty: 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).