108 20 WATER LAW : DAZA VARGAS : PROTECTION OF FOREIGN INVESTMENT : CHALLENGES FOR INVESTMENT ARBITRATION
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 perspec-
tive 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 manage-
ment framework to ensure sustainable development
and environmental protection.
It is important to note that there are substantial differ-
ences 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 infrastruc-
ture features. Therefore, it would be `misleading to
discuss resources management and services delivery in
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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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, non-
governmental 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 invest-
ment 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 Devel-
opment 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.
 DAZA VARGAS : PROTECTION OF FOREIGN INVESTMENT : CHALLENGES FOR INVESTMENT ARBITRATION : 20 WATER LAW
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 compa-
nies 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 infra-
structure, and therefore it is considered a `natural
monopoly'.10 A particular industry is generally con-
sidered 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-maximiza-
tion, a monopolist has an incentive to charge excessive
prices and under-produce, undermining the achieve-
ment 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 mono-
polistic position. `The principal benchmark for ``just
and reasonable'' rate levels has been cost of produc-
tion, 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 compa-
nies, interest groups and governments. This issue
could be analysed from the `capture theory' perspec-
tive that addresses the impossibility of regulatory
agencies to meet public interest objectives as they
appear to be `subverted by pressure, influence, and
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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109
``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 character-
ized 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' in-
vestment.
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 over-
arching 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.
110 20 WATER LAW : DAZA VARGAS : PROTECTION OF FOREIGN INVESTMENT : CHALLENGES FOR INVESTMENT ARBITRATION
obligations of foreign investors and host states or
other stakeholders.20 The novelty within such interna-
tional agreements is the dispute settlement mechan-
ism, 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 in-
vestment 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 in-
vestment'.22 Therefore, property rights are those tan-
gible 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) Non-
expropriation 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 rene-
gotiations of contracts and harassment of foreign
investors.23 Expropriation has now adopted new forms
where `[o]wnership is not transferred, but the ``nor-
mal'' 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. Re-
course 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.
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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 Cocha-
bamba, Bolivia proved to be emotional and turbulent.
In 1999 the Bolivian Government, after a public bidding
process, granted a concession contract for the provi-
sion 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 pro-
ject (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 Govern-
ment 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
 DAZA VARGAS : PROTECTION OF FOREIGN INVESTMENT : CHALLENGES FOR INVESTMENT ARBITRATION : 20 WATER LAW
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, in-
corporated 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 adop-
ted 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
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.
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111
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 consider-
ing 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 con-
tinuously 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 submit-
ted 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 Argen-
tina had violated its obligations under the BIT and
granted the claimants US$105 million compensation.
Regarding the breach of the non-expropriation stan-
dard, 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 con-
tended 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
32 CompanÄõÂa 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).
33 CompanÄia del Desarrollo de Santa Elena SA v Republic of Costa
Rica (ICSID Case No. ARB/96/1) (Award: 17 February 2000 and Rectifi-
cation 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.
112 20 WATER LAW : DAZA VARGAS : PROTECTION OF FOREIGN INVESTMENT : CHALLENGES FOR INVESTMENT ARBITRATION
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 holi-
stic 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.
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 for-
eign 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 envir-
onmental sustainability do not only concern develop-
ing countries; they also affect developed countries.
A first source of potential tension is between secure
rights for investors against adaptive and flexible regu-
lation 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 deep-
rooted 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 Amer-
ica 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
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 Medioambien-
tales 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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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 Agree-
ment (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
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
an Ecological Decree declaring a Natural Area for the
protection of rare cactus. The Natural Area encom-
passed 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 perma-
nently 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 accord-
ing to the treaty provisions, so that was the point of
39 The North American Free Trade Agreement between the Govern-
ment 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 environ-
mental 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.
 DAZA VARGAS : PROTECTION OF FOREIGN INVESTMENT : CHALLENGES FOR INVESTMENT ARBITRATION : 20 WATER LAW
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 invest-
ment 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 protec-
tion to the investor's property rights. If not, it may
grant compensation to the investor. The risk of dis-
regarding 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 pur-
poses, whether domestic or international, the state's
obligation to pay compensation remains.49
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 consti-
tutes a `normal government regulation' or an `imper-
missible indirect expropriation' is still the subject of
discussion not only at the heart of the international
investment arbitration sphere, but also among aca-
demics, practitioners and international organiza-
tions.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.
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As opposed to the Santa Elena case, some arbitral tri-
bunals 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 non-
discriminatory 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 regu-
lation 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 com-
promise 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
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 Agree-
ments' 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.
114 20 WATER LAW : DAZA VARGAS : PROTECTION OF FOREIGN INVESTMENT : CHALLENGES FOR INVESTMENT ARBITRATION
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 con-
sistency 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 incon-
sistent interpretation and application of IIAs.
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, inter-
pretation 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 iden-
tical, 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 regula-
tion 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 assert-
ing that international investment jurisprudence is pos-
sibly 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 Interna-
tional; 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).
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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 Repub-
lic 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 Re-
public 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 arbitra-
tors to interpret the relationship between the opera-
tive 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, Metha-
nex v United States 70 and Metalclad v Mexico 71 consti-
tute examples of divergent approaches to what
appears to be the same regulatory measure.
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 Argenti-
na) (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).
 DAZA VARGAS : PROTECTION OF FOREIGN INVESTMENT : CHALLENGES FOR INVESTMENT ARBITRATION : 20 WATER LAW
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 increas-
ingly, 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 manage-
ment 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 inter-
national investment law.
As law evolves, expands and specializes, overall nor-
mative coherence becomes elusive and the likelihood
of potential conflicts linked to interplay between dif-
ferent 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 protec-
tion 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 pur-
poses 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. How-
ever, new types of disputes are likely to arise when
prioritization, allocation and reallocation among com-
peting 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 AdministracioÂn Del Agua Y La InversioÂn Extranjera
Directa ¿CoÂmo Se Relacionan?' in Universidad de Costa Rica (UCR)
(ed) Estudios En Homenaje Al Dr. Rafael GonzaÂlez Ballar (Isolma SA
San Jose 2009) 4, 12.
74 See D A Tarlock `National Water Law: The Foundations of Sustain-
able Water Use' (2004) 15 Journal of Water Law 121; D A Caponera
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115
have generally been allocated according to expec-
ted historical availability75 and the particularities of
each country, very much in line with current conven-
tional 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 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
usually guarantee complete property rights.76 Further-
more, adaptive management to competing uses due to
increasing demand, plus additional pressures on water,
such as population growth, economic development, mi-
gration and climate change, requires prioritization of
water uses. This, in turn, involves the necessity of a
more flexible approach toward allocation and realloca-
tion 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 Develop-
ment (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.
116 20 WATER LAW : DAZA VARGAS : PROTECTION OF FOREIGN INVESTMENT : CHALLENGES FOR INVESTMENT ARBITRATION
Competition among water users is likely to be exacer-
bated 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
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 strate-
gies 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 protec-
tion such as international investment arbitration.
Environmental regulation has been subject to incon-
sistent 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.
8 THE UNIQUE NATURE OF WATER
RESOURCES: FROM DIVERSE PERSPECTIVES
This section contends that water has a unique and indi-
visible 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-substitut-
ability 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).
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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 recog-
nized 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 sanita-
tion 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
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 `ulti-
mate 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, alter-
native 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
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.
 DAZA VARGAS : PROTECTION OF FOREIGN INVESTMENT : CHALLENGES FOR INVESTMENT ARBITRATION : 20 WATER LAW
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
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 character-
istics 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.
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 ser-
vices. 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 evi-
dent relationship, investment arbitration appears to
disregard issues of global concern, such as the right to
water and its importance for human life. The incon-
sistency 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 manage-
ment. 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 avail-
ability 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 consider-
ably 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.
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117
. . . 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
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 frame-
works. 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 con-
sequence, 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 in-
stance, Peru's new Water Act regulating water re-
sources 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 manage-
ment, 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 environ-
ment occurred, occurs or may occur that was not
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 Devel-
opment 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), avail-
able 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.
118 20 WATER LAW : DAZA VARGAS : PROTECTION OF FOREIGN INVESTMENT : CHALLENGES FOR INVESTMENT ARBITRATION

reasonably foreseeable at the time the licence was
issued'.99 Should this be the situation ± in the ex-
ample of the mining company ± a case for arbitration
could be raised by the investor against the Govern-
ment 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 interna-
tional 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 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).

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