WHO OWNS “YOUR” WATER? WATER AND FOREIGN INVESTORS IN THE POST-NAFTA CONTEXT

HOWARD MANN [i]
Prepared for the Water for the Americas in the 21st Century Conference
Mexico City, October 9, 2002

Preliminary note:It is important to note at the outset that NAFTA is critical to understanding water management issues in the Americas both in its own right, and because it is the forerunner of many bilateral investment agreements that contain provisions similar to NAFTA.NAFTA also provides the basic text for much of the Free Trade Area of the Americas negotiations.In this context, NAFTA provides a warning bell for what is already beginning to happen with these other agreements.

1. Water and NAFTA: The First Debate

The NAFTA debate on water began just as soon as the ink was dry.The chief source of concern was Canada.Would NAFTA mean that Canada had to export water from its lakes and rivers to the United States if the US demanded it?This issue became so serious in 1992-93, that Canada demanded an interpretive note from its NAFTA partners ensuring that it could not be compelled to export freshwater.The key text of the NAFTA statement of September 1993 states that: [ii]

Unless water, in any form, has entered into commerce and become a good or product, it is not covered by the provisions of any trade agreement including the NAFTA. And nothing in the NAFTA would oblige any NAFTA Party to either exploit its water for commercial use, or to begin exporting water in any form.

The Statement went on to say that water in its natural state was governed by other transboundary agreements between Mexico and the United States and Canada and the United States.

As often happens when controversies are addressed after an agreement is signed, the statement leaves as much open to question as it seeks to make certain.First, it is clear that if water has entered into commerce and become a good or a product it is covered by NAFTA.This is so even, for example if it is sold through a water diversion project.(It is important to note here that this means when water is sold, not shared on a non-commercial basis between states under other international agreements.)Second, while the statement says that water in its natural state in lakes and rivers is not a good or product, this does not mean that rights to use or take the water may not be subject to NAFTA.The impacts of NAFTA on these issues are noted below.

Following this initial concern, the issues around NAFTA and water lay dormant for several years.Now, however, with access to water a serious issue for millions, with water rights a major investment, and with foreign investment becoming a dominant part of water and wastewater management in many countries, it is imperative that water managers have a basic understanding of how NAFTA and other agreements can impact on water management at the local level.

2. NAFTA, WTO and Water: The State of the Law in Brief

There is no doubt that when water is sold in a package – a bottle, bag, tanker, etc. – it becomes a good in commerce.When this happens, all the rules on trade come into play.So imports and exports of bottled water, for example, cannot be constrained without due consideration for trade rules.In many cases, this may mean that no legal constraints on exporting water in such forms would be allowed, though there may be some exceptions to this general rule.This applies both under NAFTA and WTO rules.

Important questions arise as to whether a single licence or permit to export water from freshwater sources, especially water in bulk containers like ships, large floating bags or tankers means that water as a whole, or perhaps water from that state or province has now entered into commerce.If it has, then this would mean that other potential sellers of water could ask for equal, non-discriminatory access to that freshwater resource, thereby allowing or even requiring water to be sold in bulk to other purchasers.There is no definitive answer, but the fear of a single export leading to broader rights was so significant in the Canadian province of Ontario in 1998, that it became a factor in withdrawing a permit after it was issued. [iii] It must be taken that seriously.

An equally important concern in the management of water is the provision of drinking water and wastewater services.In many countries, this is considered a government or public service.However, there are several countries that have privatized these services, and others that are continually being pressured to do so in WTO processes, through World Bank programs, and in other aid contexts.

For most countries, trade law does not require the privatization of these services.Whether this will continue to be the case after the Doha Round of WTO negotiations, and the FTAA negotiations, is not clear now.Some states have already indicated they will try to require this of others during the WTO negotiations on services.Negotiators, all levels of government and civil society must follow these issues carefully, including the small details in definitions, etc.

Whether trade law requires access to be given to foreign service providers or not, parts of it become relevant if a state chooses to open these services to the private sector.In particular, the provisions in NAFTA’s Chapter 11 on Investment and a multitude of Bilateral Investment Agreements (BITS) would then become applicable where such an agreement applies to the host state. [iv] Under the investment provisions, once a previously public-run sector is opened, and unless there is a specific reservation that excludes that sector from the investment and services rules of an agreement, foreign companies must be given equal opportunities to provide the service in question.They have the right to bid in a non-discriminatory way, to establish the necessary service base if they win, and then to collect profits, etc.Increasingly, foreign investors are relying on a set of five rights, the full description of which is beyond this paper:

  • The right to receive national treatment
  • The right to receive most-favoured nation treatment
  • The right to be treated in accordance with minimum international standards
  • The right not to be subject to performance requirements
  • The right to fair treatment regarding expropriation

Each of these areas is subject to a special set of remedies available only to foreign investors, the so-called investor-state arbitration process. [v] These foreign investor rights and remedies basically displace the domestic legal regimes today in so far as the investor’s rights are concerned.They can turn to these agreements to claim and litigate their rights without using domestic legal systems first, and without reference to domestic law as the primary issue.These cases are often conducted in near total secrecy as well.

3. Water Management: The Implications of NAFTA and other investment Agreements

All of the above factors have a number of important implications for water management today and in the future.We have already noted that a single initial sale of water as a good on a transboundary basis may open the door to all potential water retailers seeking access to water for this purpose.This poses a significant risk for freshwater management, especially if demands for water continue to rise as they are.In this context, at least two NAFTA cases not related to water issues [vi] have now said that the right to export is a protected right as part of a business operation under Chapter 11 of NAFTA. [vii]

Second, we have also already noted that once a state moves away from public water services to private companies providing the service, important trade law and investment agreement rules come into effect.Where a foreign service provider begins to provide formerly public services, it will receive the protections of applicable investment rules and the investor-state arbitration process. This may include the right to purchase water rights on a non-discriminatory basis with local and historic users of water, and to protect their economic interests in their project.But it may also ensure rights that are greater than local users have if contracts and laws relating to these matters are not clearly set out.For example, if indigenous peoples’ or local farmers’ rights of access are not recognized in law, the foreign investor may seek to displace them using its international rights.>

Investments relating to water issues may not only concern water services or products per se.Where an investor opens a facility that must draw water to operate, reductions in the allowed or anticipated level of water usage may be considered an expropriation by an investor, and subject to challenge under investment agreements.Again, this could result in traditional users of the water being displaced.Even a very significant rise in water rates might trigger such a suit, and some NAFTA cases suggest a large increase could be a legitimate basis for a claim.

In addition, changes to water pollution rules can lead to claims by foreign investors that their rights are being breached.For example, if new anti-pollution rules significantly impact the operation of an investment, it may well be able to claim compensation for this under expropriation protections of investment agreements.While many observers reject this interpretation of the law on expropriation, it is clear that arguments on these lines have not been foreclosed by the NAFTA cases that have made decisions on related issues.If this approach were successful in future investment cases, it would mean that countries will have to pay foreign investors compensation if they wish them to stop polluting.Negotiators of investment rules must be very conscious of this possibility today.

It is not the trade or investment rules that create contracts between foreign investors and local authorities or fully define the locally applicable laws on access to water or maintaining water quality.And trade law does not, today, mandate the privatization of public services.(The role of international banks and aid is not discussed here.)However, if contracts and laws do not expressly recognize and give priority to the rights and needs of local citizens, or are not sufficient to ensure long-term water quality management, the international rules will reinforce any weaknesses and imbalances by ensuring the investor’s rights can be enforced under international law, and outside of national legal systems.This makes subsequent changes in contract terms and local or national laws more difficult, and potentially too costly to undertake.

In addition, the ability of foreign investors to utilize the investor-state arbitration process and litigate issues strictly under international law as opposed to domestic law can distort national dispute resolution processes.When a foreign investor can engage a legal process that is secretive and lacks recognition of domestic legal and social contexts, where others can only seek to resolve disputes within that local context, there is an obvious risk of an imbalance in the respective position of foreign and domestic users of the resource.

5. Conclusions

The title of this paper is “Who Owns “Your” Water?However briefly, this paper has sought to show the risks trade law and investment agreements create to traditional conceptions of a state “owning” its own water resources, and local citizens and users having priority rights of access and use.While a state will not lose jurisdiction in a strict legal sense over its water, it is clear that there is a significant risk of existing agreements placing very strong limits on how that jurisdiction is used, and of new agreements placing even greater restrictions. These agreements can therefore have significant impacts on local and regional water management decisions, and on traditional users of water resources.

Foreign investment is a critical factor for development today.But care must be taken that the international law framework for this investment is well understood and is fully reflected in how water resources are managed.Mistakes now will be much more difficult to recover from later.


[i] Howard Mann, Ph.D., is Senior International Law Advisor for the International Institute for Sustainable Development, based in Canada. See www.iisd.org. Dr. Mann is also a practicing international lawyer specializing in International Sustainable Development Law, based in Ottawa, Canada. See www.isdlaw.com
[ii] 1993 Statement by the Governments of Canada, Mexico and the United States. This statement does not appear to have a formal name or number.
[iii] Notice of Withdrawal of Licence, issued by Paul Odom, Director, Ministry of the Environment, Ontario to Nova Group, July 7, 1998.
[iv] Normally, both the host state and the home state of the foreign investor must be party to the agreement.However, recent experience indicates that companies are now establishing subsidiaries and off-shore companies in countries with such agreements to be able to take advantage of them.As a result, they are getting around the requirement for their own home state to be a party.
[v] A full description of the rights and the investor state process can be found in “Private Rights, Public Problems: A Guide to NAFTA’s Controversial Chapter on Investor Rights”, International Institute for Sustainable Development/WWF-US, 2001, at www.iisd.org/trade/private_rights.htm.
[vi] There is one NAFTA case on water export issues that was commenced, but it has never been pursued, and it is doubtful at this time it will be.This is Sunbelt Water v. Canada.See http://www.dfait-maeci.gc.ca/tna-nac/gov-e.asp
[vii] See the analysis, Ibid.