The Energy Charter: foundation for future PPP pipelines?
Public-private partnerships (PPPs) play a crucial role in facilitating private sector participation in the delivery of energy sector projects. In particular, PPPs are instrumental tools for delivering massive infrastructure needs in the era of energy transition, including achievement of the United Nations Framework Convention on Climate Change (UNFCCC) Paris Agreement goals and the UN’s Sustainable Development Goal Number 7 of universal access to affordable, reliable, sustainable and modern energy. Given the enormous investment requirements of the energy sector, pipelines of PPPs are needed, not just one-off financial transactions with the private sector.
However, a country first needs to get to the point where private investors will even consider discussing the possibility of entering into a PPP with the host country. PPPs are difficult to establish and deliver if political risks are high and if the policy environment is unstable. From the private sector’s perspective, PPPs need to be based on firm legal and policy foundations and long-term political commitment. It is precisely this that the Energy Charter Treaty (ECT or Treaty) was designed to provide when it was drafted back in the 1990s.
The ECT, investment protection and disputes
The Treaty grants a number of fundamental rights to foreign investors with regard to their investment in the host country. Foreign investors are protected against the most important political risks, such as discrimination, expropriation and nationalisation, breach of individual investment contracts, damages due to war and similar events, and unjustified restrictions on the transfer of funds or use of expatriate personnel. Enforcement of the ECT and investors' rights is ensured through investment dispute settlement which includes international arbitration, domestic courts and any other pre-agreed dispute settlement mechanism, if disputes cannot be resolved through informal mechanisms or mediation.
While the original intention of the ECT in mobilising foreign investment is clear, a review of UNCTAD’s Investment Dispute Settlement Navigator database on ISDS cases shows that the ECT is the most invoked investment agreement for the cases identified. Furthermore, the electricity sector is the economic sector taking the highest share of investment disputes under international investment agreements (IIAs), according to analysis of cases conducted by UNCTAD, and nearly all these disputes involve PPPs. Disputes resolved through arbitration can be undesirable for both States and investors when they are costly, time-consuming and if they lead to a breakdown in trust between parties. Ultimately, investment flows may decline. This is a no-win situation that should be avoided.
Therefore, in 2016, the Energy Charter Conference endorsed theGuide on Investment Mediationand encouraged Contracting Parties to consider to use mediation on a voluntary basis as one of the options at any stage of the dispute to facilitate its amicable solution and to consider the good offices of the Secretariat.
Adapting to changing circumstances
In order for the ECT to work effectively at the national level, domestic legal frameworks may need to be reinforced. This can be done through more detailed secondary legislation and regulation, administrative rules, strong governance and institutions, soft law or supporting instruments, effective procedures, appropriate communication channels, additional incentives and so on. Indeed, PPPs need their own legal and policy frameworks. In principle, it is a preferable approach to have core principles, investor rights and dispute mechanisms set down in high-level framework legislation, as provided by the ECT, with detail specific to PPPs in secondary (domestic) law that can be more easily amended, if necessary to respond to changing market or policy conditions.
It is a positive attribute that the high-level framework legislation should have less need to be changed over time, as this provides investors with some stability. On the downside, however, reform of a multilateral agreement such as the ECT is likely to be a challenging process. Until now, ECT modernization efforts have focused on additional tools. At some point, however, changing conditions may require reform of the higher-level framework too. ECT members have recently recognised that it could be a timely moment to consider whether reforms are needed. As a starting point, a new political declaration was adopted in 2015, called the International Energy Charter.
In January 2017, several experts from industry, governments, academics and international institutions (including officials from UNCITRAL and UNCTAD) discussed the investment protection standards under the ECT and concluded that some particular issues could benefit from additional clarification. Later in the year, the ECT’s Contracting Parties and Signatories also analysed and considered current investment policy tendencies incorporated in IIAs.
At the end of 2017, the Energy Charter Conference launched discussions, in consultation with stakeholders and observers, to consider whether and how to update and clarify the Treaty, to be sure it is ready for the challenges and opportunities of the future.
Members’ internal discussions and consultations currently focus on the scope of the potential reforms/clarifications and are paying attention to new approaches being taken in new IIAs and in reforms to other existing IIAs. Some issues currently under consultation (CCDEC2017 23) include, but are by no means limited to, investment protection standards and transit. By the end of this year, ECT Contracting Parties aim to conclude a closed list of items that could be considered for negotiations.
The ECT is about more than just investment protection
While the spotlight might be on investment protection standards and dispute-settlement mechanisms, it should be remembered that the ECT encompasses far more than just investment protection. Guiding principles embedded in the ECT promote an economically efficient and cooperative approach to development of the energy sector. These principles are set out in a number of chapters in the ECT and include fair competition, trade rules, transparent markets, market-orientated price formation that more fully reflects environmental costs and benefits, and the principle that the polluter should bear the cost of pollution. This approach ultimately helps countries achieve a least-cost mix of sustainable energy resources and affordable energy security for consumers, which is particularly relevant to securing public and political support for the energy transition.
Through provision of technical and advisory tools, the Energy Charter Secretariat supports ECT members in their efforts to implement the ECT and also assists countries with amicable dispute resolution and dispute prevention. These tools and services include the recently published Investment Facilitation Toolbox, mediation training, best practices in regulatory reform and the forthcoming Energy Investment Risk Assessment (EIRA) report, due to be published before the end of 2018.
For further information about the International Energy Charter, see www.energycharter.org
*Views expressed in this publication reflect the opinion of the individual author and not those of the Energy Charter Secretariat.