1. Will International Investment Rules Shrink Policy Space for Sustainable Development? Evidence from the Electricity Sector Navroz K. Dubash Albert H. Cho World Resources Institute Washington, DC Will International Investment Rules Shrink Policy Space for Sustainable Development? Evidence from the Electricity Sector Navroz K. Dubash Albert H. Cho World Resources Institute Washington, DC

2. 2 Motivation Policy space for sustainable development Innovative, heterodox economic, social and environmental policies Unravelling of the Washington Consensus lends support But lack of specificity in policy space discussions Electricity: a good test case Financial flows: US$20-40 billion per year in 1990s Social and environmental significance Transformation from public monopoly to private competition

3. 3 Question and Approach Will investment rules constrain policies for sustainable development in the electricity sector? Are there policies that governments could reasonably seek to pursue that appear inconsistent with investment rules? Can governments reconcile policy space with investment rules in practice? Case study approach Identify innovative electricity policies: social, environmental, economic Apply likely GATS and investment disciplines – inherently speculative in absence of case law Burden of proof: policies that countries may reasonably retain the option to implement

4. 4 Investment Rules Proposed “Multilateral Investment Framework” (MIF) Disciplines of particular interest: Pre-establishment national treatment Prohibitions on performance requirements Prohibitions on indirect expropriation Dispute Settlement

5. 5 Black Economic Empowerment in South Africa Goal: to facilitate economic participation by black South Africans Policy: Several elements: A proportion of privatized electricity assets reserved for BEE firms BEE “scorecards” developed for firms based on black ownership, procurement from BEE enterprises and employment equity Government contracts may give priority to high- scoring firms Result: Too early to tell

6. 6 Merits of the policy Controversial, but cornerstone of development policy Intended to develop management skills and experience in underprivileged populations Too early to judge outcomes, but Malaysia may provide guidance

7. 7 Potential for Conflict Reserving ownership of electricity assets for local disadvantaged groups is inconsistent with national treatment Rewarding firms for procuring from BEE firms may be an implicit performance requirement Future negotiations on services procurement may restrict government ability to reward compliance with BEE

8. 8 Renewable Portfolio Standards in Arizona Goal: 1.1% of energy must be from renewable sources by 2007, of which 60% must be new solar capacity Policy: a “Solar Development Strategy” – “Bonus” production credits go to firms using solar equipment manufactured in Arizona Result: Has produced a thriving renewable energy industry in Arizona – over $50 million in annual exports

9. 9 Merits of the policy Problem of building political consensus RPS often difficult to pass in US Renewable energy more expensive Environment a relatively low priority Early investor disadvantage By linking RPS to local job creation and technology development, RPS was easier to sell to a skeptical public

10. 10 Potential for conflict Many international investment agreements contain prohibitions on “performance requirements” In NAFTA, for example, “No Party may condition the receipt or continued receipt of an advantage…on compliance with any of the following requirements: …to purchase, use or accord a preference to goods produced in its territory” (1106c)

11. 11 Crisis Management in Argentina Goal: To mitigate impact of 2001 economic crisis Policy: Pesofication of utility contracts, utility rate freezes Results: Economy gradually recovering, but under threat of $17 billion in claims before ICSID

12. 12 Merits of the policy During crisis, losses accrued by nationals and local investors Mandatory contract renegotiation with government and independent oversight Way to “bail in” private foreign investors

13. 13 Potential for Conflict Potential conflict with BITS signed with USA and France, among others Issues include: –“fair and equitable treatment” –“indirect expropriation” At least 12 cases filed before ICSID on energy issues Potentially unequal outcomes for local/foreign investors

14. 14 Implications for Cancun Concerns over policy space are real Difficult to preserve needed space in practice: Capacity issues and imperfect foresight National bureaucratic politics Dynamic changes in policy environment Cost of inflexibility given changing political contexts

15. 15 Concluding Thoughts Cost vs. benefit of MIF? Costs of policy options foregone may be substantial What would a development-first investment framework look like? Root discussion in empirical experience Look beyond traditional trade disciplines

16. 16 For further information… The full paper is available at: http://pdf.wri.org/investment_rules.pdf Contact authors: Navroz Dubash (navrozd@wri.org)navrozd@wri.org Albert Cho (acho@wri.org)acho@wri.org