US China LAW Jurnal 2008 6.pdf

Is the erecting of barriers against foreign Sovereign Wealth Funds compatible with international investment law?

Mathias Audit (University of Caen, France)

Abstract: The impact of overseas investments by Sovereign Wealth Funds (SWFs) is increasingly causing alarm in destination countries. Many western governments show high concern with SWFs investing in some of their strategic economic sectors, such as energy or high technologies. Consequently, several of these governments have issued new domestic rules to control and even cancel investments operated by SWFs, or are about to do so. The aim of this work is to assess the compatibility of these new legislations with international investment law.

Key words: Sovereign Wealth Funds; overseas investment; international investment; barriers; soft law option; hard law option

1. Introduction

In the 1990’s, no one could have foreseen that state-owned companies would become major players of globalization. Following the fall of the Berlin wall, their presence in international business transactions had been steadily decreasing. However, this trend has changed since the beginning of the Second Millennium. Since then, some states are again playing a role in the international economy. However, unlike during the Cold War era, these are not socialist states engaged in international trade with Western companies. Instead, we are seeing a genuine form of state capitalism by which some of them are using specific investment vehicles to invest assets in North American and European markets. Sovereign Wealth Funds (SWFs) represent this not-so-new trend of states involved in globalization.

Historically, the first SWFs are supposed to be the Kuwait Investment Authority and the Kiribati Revenue Equalisation Reserve Fund, which started in the 1950’s. But it is clear that the major impact of SWFs on global economy is much more recent.

Firstly, twenty new SWFs have been established since 2000, including twelve since 2005. Amongst the recent SWF owners are some major countries like Russia and China, whose geopolitical interests are much greater than those of traditional SWF owners like the Gulf countries. Moreover, new states are planning to create SWFs, like Brazil, Libya, Algeria, and Venezuela.

Secondly, SWFs have never been so wealthy and this is largely due to the origin of their financial resources. If some of them rely on their central banks’ reserves like China Investment Corporation, most of them draw their wealth from the exploitation of raw materials. Therefore, increase of their assets is proportional to the dizzying rise of oil and gas prices. In fact, oil’s incomes are supposed to represent two-thirds of the SWF’s assets, which

have been evaluated in 2007 between 2,200 and 2,500 billions US Dollars 1 . A Morgan Stanley’s Report even

Mathias Audit , professor of law, University of Caen, France; research field: private law. 1 Martin Wolf. (Oct. 17, 2007). We are living in a brave new world of state capitalism. Financial Times.

Is the erecting of barriers against foreign Sovereign Wealth Funds compatible with international investment law?

states that this amount could reach 12,000 billions US Dollars by 2015 2 . Only speaking about the three richest SWFs, it is said that 875 billions US Dollars are at the Abu Dhabi Investment Authority’s disposal, while assets of

Government of Singapore Investment Corporation and Government Pension Fund-Global from Norway are between 320 et 330 billions, respectively 3 . Therefore, the influence of SWFs on global economy is already very

high and it is quite certain that it will be even greater in a very near future. However, an essential aspect of SWFs’ functioning is that these abundant financial resources are not locally invested. Using SWFs, their governmental owners are investing in European and North American markets. Besides, placements are quite variable, ranging from acquisition of shares, via subscription of bonds, or other financial securities, and real estate. Some SWFs have even chosen to take stakes in hedge funds.

For the moment, financial analysts consider the impact of SWFs on global economy to be positive 4 . Especially during the recent financial crisis following weakness in the US housing sector (the so-called “subprime

crisis”), several SWFs had been financially supporting some major western banks. In December 2007, Government of Singapore Investment Corporation had hence invested in the Swiss bank UBS, while at the same time China Investment Corporation was buying 9.9% stake in Morgan Stanley. In the meanwhile, City Group had announced that it would sell $7.5 billion of securities to the Abu Dhabi Investment Authority. As of February 2008, the Investment Authority from Qatar has also taken a participation in the capital of Credit Suisse.

But this positive impact does not place SWFs above all suspicions. Even if SWFs are proper legal persons, their assets come directly from their home governments’ resources. Therefore, the question of their independency arises. Regardless of the search of financial return, SWFs could be used by their home governments to achieve

international policy goals. As such, host countries may frown upon SWFs’ 5 investments on their soil . For example, a SWF taking equity stakes in strategic economic sectors of a Western country could be seen as

a problem. It is obvious that the US Government would not accept that China Investment Corporation invest in the US military industry. For similar reasons, Germany does not want the new Russian SWF launched in February 2008 to invest in the German energy sector.

Hiding behind the investor, the presence of a foreign government whose interests are not purely economic or financial could always be suspected. Therefore, attendance of representatives of a foreign SWF at the board of any strategic company could be seen as undesirable. Taking a majority stake would be seen as even more problematic. Besides, it is not only defense, energy and high-tech industries that are susceptible of being negatively impacted by SWFs. As shown by the western reaction when Qatar’s SWF entered the capital of the London Stock Exchange, an equity stake in a purely financial sector may also raise strategic interests.

In fact, when SWFs are at stake, western countries face a dilemma. On the one hand, they do need SWF cash to energize their national economy again, especially after the subprime crisis. On the other hand, they fear that those foreign and sovereign investments hide geopolitical goals. Part 2 sets out that this somewhat schizophrenic attitude has led them to a radical strategy for regulating SWF investments. But if the legal response chosen by western states leads to the erection of barriers against SWFs’ investments, Part 3 argues that constraints imposed by international investment law have then to be taken into account. In Part 4, the paper concludes.

2 How big could Sovereign Wealth Funds be by 2015? Retrieved March 3, 2007, from: http:// www.morganstanley.com/views/ perspectives/ files/soverign_2.pdf.

3 Deutsche Bank Report: Sovereign Wealth Funds—State investment on the rise. Retrieved Sept. 10, 2007, from http://www.dbresearch.com. 4

The invasion of the Sovereign-wealth Funds.(Jan. 17, 2008). The Economist. 5 The invasion of the Sovereign-wealth Funds.(Jan. 17, 2008). The Economist.

Is the erecting of barriers against foreign Sovereign Wealth Funds compatible with international investment law?

2. Choosing a legal response to SWFs

Facing what is viewed as a potential threat for strategic sectors of western economies, it is usually said that new legal rules are needed 6 . But these new rules could be of two different types. Two various categories of legal

answers to SWFs are actually competing. The first one is also the smoothest: It consists on the issuing by international institutions of soft law principles to be acknowledged by SWFs (See Sect. 2.1). The second one is a much tougher response: some western countries want to adopt domestic law measures against SWFs’ investments in strategic economic sectors (See Sect. 2.2).

2.1 International soft law option

In October 2007, G7 Finance Ministers and Central Banks Governors met in Washington for the IMF/World Bank annual meeting. They did agree that SWFs became essential participants in the international finance system and moreover that G7 states economies can benefit from openness to SWFs’ investment flows, as shown during the subprime crisis. But they also stated that best practices for SWFs should be identified in areas such as institutional structure, risk management, transparency, and accountability. Therefore, participants have asked IMF,

World Bank, and OECD to examine these issues and to make proposals on these matters 7 . Following the G7 Finance Ministers request, these international economic institutions began to work on these

matters, but from different point of view. OECD is focusing on recipient countries’ 8 policies toward investments from SWFs . The general idea is to

encourage states hosting those investments not to infringe liberalization of transnational capital movements. Therefore, OECD started to develop best practices whereby adhering governments will commit to the principle of non-discrimination in a sense that foreign investors are to be treated not less favorably than domestic investors in same situations; to the principle of transparency in a sense that information on restrictions on foreign investment should be accessible and, more generally speaking; to the principle of liberalization of capital movements.

IMF is also developing international principles in the field. But unlike OECD’s work in progress, IMF’s principles are not targeting recipient countries but the SWFs themselves. The international organisation is developing a SWF code of conduct. For this purpose, it has established an International Working Group (IWG) of

Sovereign Wealth Funds that is to present a set of SWF principles by October 2008 9 . These principles will certainly include some basic governance and transparency standards to be applied to

SWFs, likely to reassure countries hosting their investments. The overall aim of this future code of conduct is to enhance the transparency, predictability and accountability of SWFs’ investments. This requires obtaining greater clarity and insight into the governance of SWFs, and improving the quality of information they provide to markets

and hosting countries on their size, investment objectives, strategies, and origin of resources 10 . This idea of a code of conduct is spreading through other multilateral institutions. For a while, the EU

Jeffrey Garten. (Aug. 8, 2007). We need rules for sovereign funds. Financial Times; International investment of sovereign wealth funds: Are new rules needed?. (Oct. 2007). OECD, Investment Newsletter.

7 Statement of G-7 Finance Ministers and Central Bank Governors. Retrieved from http://www.mof.go.jp/english/if/g7_071019.pdf. 8 See OECD, Sovereign Wealth Funds and recipient country policies. (April 4, 2008). Retrieved from http://www.oecd.org/dataoecd/

34/9/40408735.pdf.

10 See http://www.imf.org/external/np/sec/pr/2008/pr0897.htm. E.M.Truman. Sovereign Wealth Funds: The need for greater transparency and accountability. Peterson Institute for International Economics, Policy Brief, 07-6.

Is the erecting of barriers against foreign Sovereign Wealth Funds compatible with international investment law?

Commission was engaged in the planning of an EU-wide law to regulate SWFs 11 . But, the EU Commission has recently changed its mind, moving to a soft law solution. In a communication on SWFs, it proposes a common EU

approach to protect legitimate policy interests but “without falling into the trap of protectionism” 12 . For this purpose, the EU Commission vouches to support the multilateral work of the IMF.

The legal answer to SWFs, consisting in the adoption of principles listed in a code of conduct, seems to have gained a large approval. And it is clear that this soft law option has a major advantage: It will not frighten SWFs and divert their investments from Western economies. For the moment, the impact of SWFs on global economy has been beneficial, especially in Europe and North America. Several banks have been saved from disaster thanks to SWFs’ assets. Therefore, it is often argued that the legal environment should not be too coercive for state-owned funds investing off shore, which is the case with a code of conduct.

But for some governments, opting for a voluntary code of conduct for SWFs is inadequate, precisely because it is not sufficiently compulsory. Like soft Law in general, the implementation of best practices issued by international institutions will rely on the sole will of the government-owned funds. It will not be compulsory for SWFs to adopt these principles and moreover to comply with them. If a particular fund does not fulfil its commitments, it will not incur any legal sanctions, nor could it be sued.

This lack of possible legal enforcement is actually leading some states to another kind of answer to SWFs’ investments taken as potential threats. This other option lies in the adoption of domestic laws erecting barriers against states-controlled funds.

2.2 Domestic hard law option

In recent times, several governments have modified their investment national laws to increase control on foreign states or public entities investments. Their common aim is to block SWFs or more generally foreign public entities’ investments in strategic economic sectors.

For example, in December 2007, the Canadian government issued special guidelines under the Investment Canada Act 1985 (ICA) focusing on investments pursued by state-owned enterprises 13 . Essentially, the guidelines

define them as enterprises owned or controlled directly or indirectly by a foreign government, which would include SWFs but also a national oil company, for example. According to the new guidelines, the government will notably examine adherence to Canadian standards of corporate governance. But above all, it will assess whether the state-owned enterprise will do business according to commercial dictates.

In February 2008, Australia has followed Canada’s footsteps. Pursuant to the Foreign Acquisitions and Takeovers Act 1975, Australia has adopted new guidelines for foreign governments investments on its territory 14 .

Under the Act, the treasurer may prohibit investments that are deemed to be contrary to Australia’s “national interest”. In this context, he or she will particularly assess whether the investor’s operations are independent from the relevant foreign government.

The United States have also modified their legislation to exert a more efficient control on SWFs’ acquisitions.

See the following speech of Mr. P. Mandelson, Commissioner of the European Union for Trade: Europe’s openness and the politics of globalization, The Alcuin Lecture, Cambridge, Feb. 8, 2008, at http://trade.ec.europa.eu/doclib/docs/2008/

february/tradoc_137739.pdf. See also: EC, Minutes of the 1811th meeting of the Commission held in Bruxelles (Berlaymont) on Wednesday 5 December 2007, PV(2007) 1811 final.

12 EC Communication, A common European approach to Sovereign Wealth Funds, Feb. 27, 2008, COM(2008) 115 final, at http://ec.europa.eu/internal_market/finances/docs/sovereign_en.pdf. 13

See: http://www.ic.gc.ca/epic/site/ica-lic.nsf/en/lk00064e.html#state-owned. 14 See: http://www.treasurer.gov.au/DisplayDocs.aspx?doc=pressreleases/2008/009.htm&p ageID=003&min=wms&Year=&DocType.

Is the erecting of barriers against foreign Sovereign Wealth Funds compatible with international investment law?

In this country, it is the President who has authority to suspend or prohibit any foreign acquisition, merger or takeover of a US corporation that is determined to threaten the national security. But in 1988, the President delegated this responsibility to the Committee on Foreign Investment in the United States (CFIUS) 15 . Regarding

foreign states investments, a 1993 regulation has required a specific investigation where the acquirer is controlled by or acting on behalf of a foreign government and the acquisition “could result in control of a person engaged in

interstate commerce in the US that could affect the national security of the US” 16 . US legislation was reinforced in July 2007, with the vote of the Foreign Investment and National Security

Act. This new regulation, which became effective in October 2007, extends the scope of national security reviews to cover transactions involving critical infrastructure and energy, and requires a second-stage review investigation

of most proposed acquisitions by state-owned companies 17 . On April 2008, the US Treasury Department released

a draft of rule changes needed to implement this new law 18 . The new US legislation regarding investments of foreign state-owned entities is still taking its course. It will

shortly be joined by Germany, whereby new rules on this particular matter are on their way to being adopted. Following statements of the German Chancellor, the Government has drafted a new bill focusing on foreign

states-controlled investments. A first draft was issued in September 2007 19 , but it has been modified since. The EU Commission has notified the German Government that a distinction must be drawn between foreign investment

coming from other member states of the EU and foreign investments coming from non-EU states 20 . Consequently, foreign state-controlled investors from other EU member states have been finally excluded from the scope of the

proposed regulation. In its last version 21 , it plans to create a German equivalent of the US Committee on Foreign Investments

(CFIUS) by establishing an interministerial commission with the power to review, and possibly veto, acquisitions by state-backed investment fund. Without prioritizing any specific sectors, acquisitions involving a stake in a German company of more than 25% will potentially come under scrutiny.

These new domestic legislations already adopted, or soon to be adopted, are obviously a protectionist response to the SWFs’ increasing financial power. This is quite striking at a time when free trade and open market have never been so widespread in the history of mankind.

But beyond this statement, they might be a parameter that governments willing to erect barriers against SWFs are disregarding. Adopting domestic protectionists laws might contradict some principles of international investment Law. There are constraints here that should be taken into account when adopting such new national rules.

3. Anticipating constraints of international investment law

A common measure included in all domestic laws examined above is that they entrust a particular authority with the power to suspend or prohibit foreign SWF investments. On the ground of standards defined by their

16 Section 5021 of the Omnibus Trade and Competitiveness Act of 1988 amended Section 721 of the Defense Production Act of 1950. Section 837(a) of the National Defense Authorization Act for Fiscal Year 1993, called the “Byrd Amendment”, amending Section 721 of the Defense Production Act.

17 Available at: http://frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=110_cong_bills&docid=f:h556enr.txt.pdf. 18 Available at: http://www.regulations.gov/fdmspublic/component/main?main=DocketDetail&d=TREAS-DO-2008-0001.

20 Published in the German newspaper Süddeutsche Zeitung, Sept. 30, 2007. Frankfurter Allgemeine, Jan. 10, 2008. 21 Published in the German newspaper Handelsblatt, June 2, 2008.

Is the erecting of barriers against foreign Sovereign Wealth Funds compatible with international investment law?

national rules, the Australian Treasurer or the American CFIUS, for example, will cancel an acquisition or a take-over carried out by a SWF. But an ICSD arbitration proceeding settled on the ground of international investment law is likely to challenge this particular decision taken by a national authority on the ground of a domestic law.

A protection of foreign investors is indeed organized by international investment law (See Sect. 3.1). But the question of the applicability of these standards to SWFs has to be answered. Because of their proximity with their home governments, their assimilation as foreign investors is questionable (See Sect. 3.2).

3.1 International protection of foreign investors

In principle, a state is not legally forced to admit foreign investments on its territory. There are no obligations of this kind under customary public international law. Even once the foreign investment has been let in,

international customs only provides a very basic standard of protection 22 . But this is the case in which the host state did not ratified any treaty regarding foreign investments. Nowadays, such states hardly remain. Most of them

have accepted multilateral or bilateral international instruments offering much greater protection to foreign investors.

Hence, since its creation, one of the main OECD’s missions is the development of investments between states through the liberalization of capital movements. Therefore, this international organization has developed international rules regarding investment policy. On this matter, the key OECD instruments are the OECD Code of Liberalization of Capital Movements, adopted in 1961, and the OECD Declaration on International Investment

and Multinational Enterprises of 1976, as revised in 2000 23 . But in fact it is well known that major evolutions of foreign investors status are not due to multilateral

instruments nowadays. Even if the idea of a global treaty on foreign investments is still possible 24 , it is bilateral treaties that today constitute the driving force of this evolution. One reason is that the number of bilateral

investments treaties (BIT) has increased incredibly in the past decades. It is estimated that there are 2.500 BITs entered into force around the world. They have been concluded between developing countries and developed

countries, but also between developed countries themselves 25 . One of the main characteristics of BITs is that their provisions are often quite similar. Hence, all BITs

provide standards of protection to foreign investors. For example, most of them require a fair and equitable treatment for foreign investments 26 . Very often, they also provide that host states should treat foreign investors and

investments no less favorably than its own investors. This “national treatment” clause coexists very frequently with a “most favored nation” clause, by which the host state has to treat foreign investors coming from the other part of a relevant BIT as favorably as investors coming from a third state. Most BI Ts also provide foreign investors with a protection against arbitrary or discriminatory measures, as well as direct or indirect protection against expropriation enacted by the host states.

All these provisions for the beneficial of the foreign investors would have a very light effect on recipient country’s behavior if they were not accompanied by a judicial system for enforcing them. A fundamental aspect of

R. Dolzer, Ch. Schreuer. (2008). Principles of international investment law, p. 11. 23 S.Tully. (2001). The 2000 review of OECD guidelines for multinational enterprise. 50 ICLQ 394.

24 J.W. Salacuse. (2004). Toward a global treaty on foreign investment: The search for grand bargain. In: Arbitrating Foreign

Investment Disputes, P . 51.

25 UNCTAD, Bilateral Investment Treaty 1995-2006: Trends in Investment Rulemaking (2007), at http://www.unctad.org/en/docs/ iteiia20065_en.pdf.

26 I. Tudor. (2008). The fair and equitable treatment standard in the international law of foreign investment. Oxford University Press.

Is the erecting of barriers against foreign Sovereign Wealth Funds compatible with international investment law?

actual international investment law is the role played by arbitration as a method of dispute settlement between the investor and the host state. With arbitration proceedings, the investor has the benefit of an international remedy when a dispute occurs with the host state. Moreover, through the arbitration trial, the enforcement of the standards of protection settled by the BITs is much more effective.

These investment arbitrations may take place in front of various institutions, such as the International Chamber of Commerce (ICC) or the London Court of International Arbitration (LCIA). But most cases are brought to the International Centre for Settlement of Investment Disputes (ICSID) established by the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (ICSID Convention)

signed in 1965 in Washington DC 27 . Jurisdiction of ICSID requires an investment dispute of a legal nature between a state party to the ICSID

Convention and a national of another state that is also a party to the convention. In addition, these two parties must have acknowledged ICSID jurisdiction. Especially, the consent of the host state to ICSID arbitration cannot

be founded on its sole ratification of the Convention of Washington. Traditionally, parties to the dispute gave their consent to ICSID arbitration in the contract concluded between them. A contract is concluded between a foreign investor and a state or a public entity of this state, whereby disputes arising between them will be submitted to ICSID arbitration. But this way of consenting to ICSID jurisdiction was quite restrictive. This explains that ICSID cases have remained very modest during the two first decades of its existence.

Things began to change when a second technique for the host state to give consent to ICSID arbitration arose. In fact, it has been considered that a state could give a general consent to it in a domestic law 28 or, more

frequently, in a BIT concluded with the investor’s state of origin 29 . This new solution has completely changed the nature of investment arbitration. It implies that any investor, even if he or she did not directly contract with the

host state, can bring an ICSID arbitration proceeding against the latter. The condition is that the host state has given its consent to it, especially in a provision included in the BIT concluded with the country of origin of the

investor 30 . The latter will accept this offer of arbitration by simply instituting proceeding. Nowadays, most investment arbitration cases are based on this particular method of jurisdiction established

through BITs. The remaining question is to determine if SWFs could have the opportunity to bring an ICSID arbitration proceeding against a particular state, which would have cancelled one of its investments.

3.2 Assimilation of SWFs as foreign investors

Many countries, which have adopted restric tive rules against SWFs or are on the way to adopting them, have concluded BITs with governments that own those funds. For example, the USA has signed with Bahrain a BIT on

the 29 th of September 1999, which entered into force on the 30 of May 2001. The USA also has concluded a BIT

th

with Russia (17 th June 1992). Whereas Australia has signed a BIT with China (11 July 1988), Canada has done

th

the same with the Russian Federation (29 st November 1989) and Venezuela (1 July 1996), and Germany with

th

Bahrain (5 th February 2007), Brazil (21 September 1995), China (1 December 2003), Qatar (14 June 1996) and Saudi Arabia (29 th October 1996).

28 First case: SPP v Egypt, Decision on Jurisdiction I, November 27, 1985, 3 ICSID R EP . 112.

29 First case: AAPL v Sri Lanka, Award, June 27, 1990, 4 ICSID R EP

J. Paulsson, Arbitration Without Privity, 2 ICSID R EV . FILJ 10, 238 (1995); E. Gaillard, L’arbitrage sur le fondement de traités de protection des investissements, 3 Rev. Arb., 853 (2003).

Is the erecting of barriers against foreign Sovereign Wealth Funds compatible with international investment law?

All these BITs provide standards of protection for investors of each party on the territory of the other, such as fair and equitable treatment, most favored nation clause, or a protection against arbitrary and discriminatory measures. Moreover, many of them stipulate a provision whereby each participant states recognizes ICSID jurisdiction. Therefore, an essential point is to determine wherever a SWF could challenge a decision adopted by the Australian Treasurer, the American CFIUS, or the future German commission on foreign investments, for example, canceling one of its acquisition or take-over, on the basis of a BIT conclude by its country of origin. This kind of domestic decision could obviously be judged as being discriminatory or against the national treatment clause, for example.

At the least, the relevant SWF could wish to bring an arbitration proceeding against the host state on this legal basis. It is possible that the arbitration panel will not judge that the domestic measure contradicts one of the standards of protection mentioned in the BIT. But at least, the arbitrators will discuss this point and the host state will have to defend its position and the merit of its domestic rules taken against SWFs.

But this jurisdictional debate will only be able to take place before an ICSID arbitral tribunal if a SWF can effectively have the position of a foreign investor, as mentioned in BITs and in the ICSID Convention of Washington. This implies that this SWF could be considered as a separate entity from the foreign government owning it. Hence, if a SWF is seen as the government itself, the legal dispute arises between two states (the state owning the fund and the state hosting the investment). And as it has been stated in the Maffezini case, “the Center

[ICSID] has no jurisdiction to arbitrate disputes between states” 31 . For an ICSID arbitration tribunal to have jurisdiction over a dispute between a SWF and a state hosting its

investment on the ground of a BIT concluded between the latter and the state from which the fund originates, the SWF should not be identified as its government of origin 32 . State-controlled entities are not necessarily excluded

from the protection system settled by international investment law, as long as they act “in a commercial rather than in a governmental capacity.” 33

For example, a state-owned bank investing abroad can benefit from a BIT’s provisions as long as its activities are similar to a private bank 34 . In fact, as it has been stated very early in the history of the Washington Convention,

for the purposes of the ICSID system, a “government-owned corporation should not be disqualified as a ‘national of another Contracting State’ unless it is acting as an agent for the government or is discharging an essentially governmental function.” 35

The fact that SWFs are controlled by foreign states does not preclude them from using the ICSID arbitration system, as well as their sources of financing also coming from the state. Regarding their activities, it is obvious that they are entirely similar to a private fund, and are not at all of a governmental nature.

(to be continued on Page 24)

Maffezini v Spain, Decision on Jurisdiction, January 25, 2000, 5 ICSID R EP . 396, 434: “Just as the Center has no jurisdiction to 32 arbitrate disputes between two states, it also lacks jurisdiction between two private parties”. Y. Nouvel, Les entités paraétatiques dans la jurisprudence du CIRDI. In: Le Contentieux Transnational Relatif À L’investissement

Nouveaux D éveloppements, 25 (Ch. Leben ed., 2006).

33 R. Dolzer, Ch. Schreuer. (2008) . Principles of international investment law, p.46.

34 CSOB v Slovakia, Decision on Jurisdiction, May 24, 1999, 5 ICSID R EP

. 335, par. 16-27.

A.Broches, The Convention on the Settlement of Investment Disputes between States and Nationals of Other States, 331 Recueil des Cours 354–355 (1972). See also: Salini v Morocco, Decision on Jurisdiction, July 23, 2001, ICSID R EP . 400, p ar. 33.

Jun. 2008, Volume 5, No.6 (Serial No.43) US -China Law Review, ISSN1548-6605, U S A

General analysis and recommendations on China’s legal implementation

mechanism for wetland biodiversity conservation ∗

WANG Rong, SHI Jun, YIN Hai-ping (China University of Political Science and Law, Beijing 100038, China)

Abstract: China has not formulated a comprehensive specific legislation on wetland conservation and wise use, however many laws and regulations are relevant to wetland conservation, such as Forest Law (1983), Law on Land Administration (1986). The dispersed multi-sectoral management model defined and the single resource element based management reflected in the existing legislation cannot meet the requirement for integrated wetland conservation and the needs to conserve the ecological function of wetlands. Also the major deficiencies of the existing legal implementation mechanism can be found in wetland conservation plan, public participation, operational and enforcement measures. Based on the problems, there should be provision on the responsibility of the forestry department to compile and implement wetland conservation plans, and its responsibility to cooperate with other relevant government agencies in planning. There should be specific or expanded provisions on the procedures and phases of public participation. In addition, there should be provision on litigation channels to expand the form of the public rights, and enabling mechanisms to safeguard the public rights. The improvement of relevant approaches should focus on the shift from administrative regulatory approaches towards multiple approaches combining administrative regulation, economic incentive and administrative supervision. The improvement on establishment of operational and enforcement authority should focus on the shift from substantial authorization towards both substantial and procedural authorization. There should be more specific and clear provision on the awarding measures, to fill the gaps of existing legislation and to strengthen the accountability of government agencies. In addition, this article gives specific recommendations on provisions on the systems of wetland conservation and legal implementation mechanism.

Key words: wetland conservation and wise use; public participation; wetland conservation plans

1. Introduction

To strengthen wetlands conservation, in 2004 the State Council issued the “Notice on Strengthening Wetlands Protection (Document No. 50, June 2004)” which emphasized the need to establish a comprehensive and cross-sectoral wetland conservation system through the revision of legislations, policies and investment mechanisms. The “Wetland Biodiversity Conservation and Sustainable Use” project jointly implemented by UNDP, GEF and the Chinese government responses to the call of the State Council and aims to mainstream

∗ This report is the achievement of China Wetland Biodiversity Conservation and Sustainable Use CPR/98/G32 Project. WANG Rong (1972- ), female, Ph.D. of Law, associate professor of Institute of Law and Police, director of China Center for Law

and Sustainable Development Research, China University of Political Science and Law; research fields: law and economics, environment law, resource law. SHI Jun (1984- ), male, postgraduate of School of Civil, Commercial, and Economic Law, China University of Political Science and Law; research field: environment law. YIN Hai-ping (1985- ), female, postgraduate of School of Civil, Commercial, and Economic Law, China University of Political Science and Law; research field: environment law.

General analysis and recommendations on China’s legal implementation mechanism for wetland biodiversity conservation

wetlands biodiversity conservation into national, provincial and local government’s decision-making and routine practice.

This report includes four parts: the general assessment of the current law on wetland conservation, referring to the general introduction of legislation, basic features and problems; the general evaluation and reforming recommendations of implementation mechanism for the current law on wetland conservation; the concrete legal system and relevant clauses for the regulations of wetland conservation. Every legal system contains three parts: conception and means, base of current policies and laws and recommendation for concrete clauses. The forth part is evaluation made by experts and general introduction of the experts.

2. General assessment of China’s existing legislation related to wetland conservation

2.1 Overview of the existing legislation

China has not formulated a comprehensive specific legislation on wetland conservation and wise use, however many laws and regulations are relevant to wetland conservation. There are 18 major legislations related to wetland conservation.

2.2 Basic characteristics of the existing legislation on wetland conservation

(1) Some specific legislation has general requirements for wetland conservation. Before China signed up to the Ramsar Convention 1 in the 1990s, wetland had not been considered in the Chinese legislation as a specific

and integrated target of protection, not to mention specific conservation legislation on wetland. In the 1990s, some legislation has begun to adopt the concept of “wetland” and have considered it as an independent management

unit. For example, Item 3 of Article 10 of the Nature Reserves Regulation 2 provides that “those areas which are of special protection value, such as marine and costal areas, islands, wetland, internal water bodies, forests, grassland

and deserts” shall be established as nature reserves. The newly revised Marine Environment Protection Law 3 has not only specified the protection of “costal wetlands”, but also provided a detailed explanation in its

supplementary provisions. (2) A majority of specific legislations aiming at protecting a single resource of the wetland ecosystem have provided a comparatively clear management structure, rights and obligations for the protection of a single wetland

ecological element. For instance, Land Administration Law 4 has provision on “water surfaces for breeding

aquatics”; Agriculture Law 6 has provision on “grassland, mudflats and streams; Grassland Law has provision on “all grasslands”. These provisions, from the perspective of land, water and wildlife of wetland, appointed

administrative authorities, established clear structure of rights and obligations and provided legal basis for the management and protection of these individual wetland elements.

2.3 Institutional arrangements defined in the existing legislation cannot meet the management needs of

The Convention on Wetlands, signed in Ramsar, Iran, in 1971, is an intergovernmental treaty which provides the framework for national action and international cooperation for the conservation and wise use of wetlands and their resources.

3 Nature Reserves Regulation was enacted by state council, promulgated on October 9, 1994. The Marine Environment Protection Law has been revised at the 13th Meeting of the Standing Committee of the Ninth National People’s Congress on December 25, 1999, and promulgated its revised edition for implementation as of April 1, 2000. 4

Adopted at the 16th Meeting of the Standing Committee of the Sixth National People’s Congress on June 25, 1986, was amended at the 5th Meeting of the Standing Committee of the Seventh National People’s Congress on December 29, 1988 and revised at the 4th Meeting of the Standing Committee of the Ninth National People’s Congress on August 29, 1998.

5 Adopted at the Second Meeting of the Standing Committee of the Eighth National People’s Congress on July 2, 1993, promulgated 6 by Order No. 6 of the President of the People’s Republic of China on July 2, 1993. The Grassland Law was amended and adopted at the 31st Meeting of the Standing Committee of the Ninth National People’s Congress of the People’s Republic of China on December 28, 2002; it went into effect as of March 1, 2003.

General analysis and recommendations on China’s legal implementation mechanism for wetland biodiversity conservation

wetland conservation

Wetland is an ecosystem composed of various ecological elements such as land, water, flora, fauna and microorganisms. Wetland conservation must be conducted on the basis of a systematic and integrated management institutional framework. However, under the current legislative system, different administrative authorities manage different resources. Land, water, biological resources are managed respectively by agencies of land resources, forestry, fishery, water, marine, transportation, environment protection and health. Integrated conservation of wetland is hard to achieve due to the fact that these departments usually take actions based on their sectoral interests once conflicts arise between the single resource element and the integrated ecosystem.

2.4 The single resource element based management reflected in the existing legislation cannot meet the requirement for integrated wetland conservation

As a special resource, wetland depends on the dynamic ecosystem which is formed through the interdependent linkage of its key factors (mainly refers to special types of water, soil, water-dependent or aquatic flora, fauna and microorganisms and associated water, light, heat and inorganic salt etc) to perform its function. The protection of a single resource element cannot achieve the integrated conservation of wetland. Many of the existing specialized legislations have not considered wetland as an independent and integrated protected target; on the contrary, these legislations were formulated on the basis of conserving and using each wetland element. In addition, provisions on wetland elements in these specific legislations are too general to meet unique requirements of the wetland ecosystem and wetland conservation. For instance, the pollutant discharge standard in the Water

Pollution Prevention and Control Law 7 will not bring obvious negative impacts to environment in general, however, for some vulnerable wetland ecosystem, for water that satisfied the standard could still be disastrous.

2.5 The existing legislation overemphasized the development and use of wetland’s economic functions while the needs to conserve the ecological function of wetlands cannot be met

Some specialized legislation related to wetland resource elements mainly considered the utilization of separate resource elements from the economic perspective, but with little consideration on the value of the overall ecological function of the wetlands. Therefore, the legislation objective emphasizes the efficient development and utilization of resources of wetland rather than the conservation of wetlands. These specific legislations cannot protect the ecological functions of wetland, instead the overuse of wetland caused further degradation and damage to its ecological functions. For example, the provision on reclamation of wasteland in the Land Administration Law could lead to the decrease of wetland area.

3. General assessment and revision recommendations on China’s existing legal implementation mechanism related to wetland conservation

3.1 General assessment on China’s existing legal implementation mechanism related to wetland biodiversity conservation

3.1.1 General assessment of the positive aspects in the existing legal implementation mechanism related to wetland biodiversity conservation (1) General provisions related to the requirement on cross-sectoral cooperation in planning.

7 The revision of the Law of the People’s Republic of China on the Prevention and Control of Water Pollution was adopted at the 32nd session of the Standing Committee of the 10th National People’s Congress of the People’s Republic of China on February 28th,

2008. The revised Law of the People’s Republic of China on the Prevention and Control of Water Pollution comes into force as of June 1, 2008.

General analysis and recommendations on China’s legal implementation mechanism for wetland biodiversity conservation

Basically, all the current legislation related to wetland conservation has general provisions on planning. The

Water Law 9 , Water Pollution Prevention and Control Law, Environment Protection Law and Oceanic Environment Protection Law have all provided for general requirements on cross-sectoral cooperation in planning.

For example, Article 17, 32 and 44 of the Water Law have required for the development of drainage basin comprehensive plan, water function zoning plans, and middle and long term water plans, and clearly stipulate that the planning shall be conducted by the water departments with joint efforts of other relevant departments. These provisions have laid the legal basis for cross-sectoral cooperation in the development of wetland conservation plans, and have also provided the legal linkage between different plans.

(2) The existing legislation has provided for operational and enforcement measures emphasizing the management of separate wetland resources . From the perspective of the conservation and management of separate wetland resource element, the existing legislations have provided a series of operational and enforcement measures whose major form is administrative management, such as administrative permitting, monitoring, fee collection, function zoning, dispute settlement, etc. These provisions have laid a basis for the adoption of operational and enforcement measures in wetland conservation.

(3) The existing legislation has in principle provided provisions for public participation and the general rights and obligations of the public . Some of the existing legislations have provisions for public participation in principle. For example, Article

10 11 12 11 13 and Article 21 of the Environment Impact Assessment Law , Article 6 of the Environment Protection Law, Article 5 14 of the Water Pollution Prevention and Control Law.

These provisions have laid a basis and provided guidance for strengthening public participation, by specifying relevant public rights and obligations, and the enabling mechanism for safeguarding public interests and rights in wetland conservation.

(4) The existing legislation has provided for comparatively concrete legal responsibilities of the administrative counterparts (the parties regulated by the administrative departments), and has in principle provided for the requirement on rewarding.

All the existing legis lations have provided for comparatively concrete criminal, civil and administrative

Adopted at the 24th Meeting of the Standing Committee of the Sixth National People’s Congress and promulgated by Order No. 61 of the President of the People’s Republic of China on January 21, 1988, and effective as of July 1, 1988. 9 Adopted at the 11th Meeting of the Standing Committee of the Seventh National People’s Congress on December 26, 1989, promulgated by Order No. 22 of the President of the People’s Republic of China on December 26, 1989, and effective on the date of 10 promulgation. Article 11: “ If the special plans may cause negative environmental impact and have direct impact on the environment rights and

interests of the public, the plan compilation departments should organize public hearings and studies or take other measures to solicit opinions from relevant working units, specialists and the public on the draft of the environment impact assessment report before the draft is submitted for approval, unless otherwise related to State stipulated secrets”. 11

Article 21: “ If the construction projects may cause significant negative environmental impact and involve the development of an environment impact assessment report, the construction unit should organize public hearings or studies or take other measures to solicit opinions from relevant working units, specialists and the public before the drafted environment impact assessment report is submitted for approval, unless otherwise related to state stipulated secret. The environment impact assessment report submitted by the construction units should explain the reason on the adoption or non-adoption of the comments of the relevant working units, specialists and the public.” 12

Adopted at the 30th Meeting of the Standing Committee of the Ninth National People’s Congress and promulgated on October 28, 13 2002, and effective as of September 1, 2003. Article 6: “ all working units and individuals should have the obligations to protect environment, and have the right to report and

14 prosecute against the working units and individuals that have polluted and damaged environment.” Article 5: “ all working units and individuals shall have the responsibility to protect water environment, and have the right to supervise and report on the acts which cause pollution and damage to water environment.”

General analysis and recommendations on China’s legal implementation mechanism for wetland biodiversity conservation

responsibilities for the violating acts of the administrative counterparts. For example, Chapter 5 of the Environment Protection Law has provided for a series of administrative responsibilities, such as warning, amercement, administrative penalty, administrative order to stop production or use, for reinstallment and use of environment protection facilities, for stop or close of business, and for treatment of pollution within a time limit, etc. Besides, civil responsibilities are stipulated for, such as compensation, elimination of danger and harm, etc. criminal responsibilities are also provided for in the event that serious damage to property or personnel is caused.