The other international trade agreement that has specifically been raised in relation to the Seymour project is the General Agreement on Trade in Services (the GATS) of the WTO. The GATS is built on the same basic policy framework as the investment rules of NAFTA and includes similar requirements with respect to National Treatment, Most Favoured Nation Treatment and Transparency.
However, the GATS includes no analogues to NAFTA rules concerning expropriation or, most significantly, the investor-state suit mechanism. On the other hand, the GATS is broader in its application. No other trade agreement has sought to extend the ambit of international trade disciplines so extensively to non-discriminatory domestic policy, law and programs. Nor does any other WTO Agreement approach the complexity of GATS disciplines or the byzantine classification systems it relies upon.
Also problematic is the failure of the GATS to define many of the broad concepts it seeks to establish as binding disciplines. Furthermore, the two WTO disputes which have called for an interpretation of GATS rules indicate that they will be given very broad application.
All Government Measures
The GATS applies to all measures by Members affecting trade in services [Article I]. The term measure is defined even more expansively than under NAFTA to mean any measure by a Member, whether in the form of a law, regulation, rule, procedure, decision, administrative action, or any other form [Article XXVIII].
Article I:3 of the GATS further stipulates that it applies to all levels of government, including local municipalities, and even to:
non-governmental bodies in the exercise of powers delegated by central, regional or local governments or authorities;
Moreover, as defined by WTO dispute bodies, the term affecting trade in services is intended to capture any measure that even incidentally affects services. This explains how the Autopact, which is obviously an agreement about the trade in goods, could nevertheless be found by the WTO to have offended the GATS. By this definition, it would be difficult to identify any government measure that would not be subject to the constraints imposed by this particular WTO Agreement.
Water as a Public Service
The only general exception under the GATS is for services supplied in the exercise of government authority - a term which Article I:3(c) defines this way:
a service supplied in the exercise of governmental authority means any service which is supplied neither on a commercial basis, nor in competition with one or more service suppliers. [emphasis added]
Unfortunately, the GATS does not specify the terms of this definition, which has fueled debate about the scope of this exemption. In a paper on environmental services, the WTO Services Secretariat acknowledges the ambiguity of these terms, and recounts very different views of their meaning. A recent paper by British Columbias Ministry of Employment and Investment provides an excellent review of the various and inconsistent interpretations that have been proffered about the meaning of this GATS article.
As we shall see, both design and construction services associated with the Seymour project are explicitly subject to GATS disciplines. It is with respect to the supply of water, per se, that uncertainty exists. It could be argued that by maintaining public ownership of the Seymour plant, water service is being supplied neither on a commercial basis nor in competition with other suppliers. However, it is very clear that the private partners interest in the DBO contract would be purely commercial. The structure of user charges or fees might also impart a commercial character to such services.
The key questions then, are whether GVRD water supply services are now exempt under GATS disciplines and if so, whether the establishment of a public-private partnership for water treatment and supply would be sufficient to remove that status. Moreover, in deciding whether public water services are being delivered in competition with one or more service providers, would the frame of reference for this determination be local, regional, provincial or national? Would the existence of any private sector water services provider, or public-private partner be sufficient to introduce the element of competition to the entire domain of water services, or just taint those of the local jurisdiction?
It is difficult to predict how a WTO dispute panel would answer these and other questions. We do know however, that WTO dispute bodies have demonstrated a great propensity for giving GATS disciplines a very expansive reading.
In our view, the status of water services is currently uncertain under the GATS and would certainly vary from jurisdiction to jurisdiction. For example, in both France and England water services have been privatized for some time. However, to the degree that such services may now be exempt from GATS disciplines, that status would clearly be put at risk by the participation of private-sector water service corporations as partners to the DBO contract currently being considered.
Finally, we note that under the GATS trade in services is defined so expansively as to include: 1) cross-border supply; 2) supply to consumers abroad; 3) supply through commercial presence; and, 4) supply by presence of natural persons. Obviously, only one of these modes of service supply actually involves cross-border trade in services.
While the ambition of the GATS is to establish a comprehensive code that will apply to all services, several of this Agreements more onerous provisions apply only to services which have been specifically and voluntarily submitted to GATS disciplines. Thus only certain GATS provisions apply to all services unless, as we have noted, they are deemed to be delivered in the exercise of government authority. These include the obligations concerning Most Favoured Nation Treatment [Article II], Transparency [Article III] , and Domestic Regulation [Article VI].
Domestic Regulation and Safe Drinking Water Standards
Article VI requirements concerning domestic regulation now apply to listed services, but formal efforts to expand the application of these disciplines is ongoing. The significance of these particular disciplines arises from their application to non-discriminatory domestic measures of general application. In other words, notwithstanding their inherent fairness, such initiatives are prohibited unless they:
- are based on objective and transparent criteria;
- are no more burdensome than necessary;
- do not, in the case of licensing, restrict the supply of the service; and,
- are administered in a reasonable, objective, and impartial manner.
The criteria delineated by these provisions are imprecise, subjective, and redundant. This makes the task of anticipating and steering clear of these constraints difficult.
As noted, Article VI prohibits measures which are more burdensome than necessary to ensure the quality of the service and Article XIV allows as exceptions from GATS disciplines only those measures which are necessary to protect human, animal or plant life or health. According to international trade law, the test of necessity requires a nation to demonstrate that, inter alia, it has implemented the least trade restrictive method of achieving a legitimate objective.
Take for example, the challenge of developing drinking water standards, particularly in light of scientific uncertainty about the precise point at which human health may be compromised by exposure to a particular toxic substance or pathogen. As we have seen, a DBO contractor may balk at the costs of meeting new regulatory standards and turn instead to international dispute resolution.
If such a challenge is brought under the GATS an international trade tribunal would be invited to second guess the judgment of legislators and parliamentarians about whether some other and less burdensome approach might have been adopted to protect public health. Perhaps more chlorine might have been used; or better watershed management practices adopted; or perhaps, public health officials could be more vigilant in issuing boil water advisories.
Conversely, a government seeking to defend such health protection measures would have to demonstrate: (1) that it canvassed every option which might have been adopted to improve water quality, (2) subjected each to an assessment of its impact on international trade in services, and (3) opted for the approach that was least restrictive of the rights of foreign service providers.
Furthermore, if the resolution of similar disputes is to guide, it is likely that a tribunal called upon to judge such standards may have little regard to the precautionary principle as a justification for public health measures at issue. Moreover, trade panels have demonstrated a remarkable alacrity for over-ruling public officials and lawmakers on the difficult policy, ethical and scientific questions that arise in determining appropriate standards for public health and environmental protection.
National Treatment, Market Access and Monopolies
As noted, the more onerous constraints imposed by the GATS apply only where specific sectoral commitments have been made. These include the requirement to provide National Treatment [Article XVII] and Market Access [Article XVI] to foreign services. This latter requirement prohibits six different categories of non-discriminatory regulatory controls which might otherwise apply to the provision of services, including measures which restrict or require specific types of legal entity or joint venture through which a service supplier may supply a service. It is likely, in our view, that this provision would prohibit a requirement to restrict the supply of a service to a public corporation or agency operating on a not-for-profit basis.
Another provision of the GATS to be noted is Article VIII concerning monopolies, which in Canadian parlance means Crown corporations and municipal utilities that provide exclusive services. These provisions oblige such institutions and agencies to comply with the GATS and furthermore, to avoid taking advantage of their monopoly position to compete with the private sector. We will return to consider this particular requirement under the heading privatization below.
As noted, the extent to which government prerogatives may be subject to GATS constraints depends upon the services it has listed to GATS schedules. The listing process allows a country to specify which precise GATS disciplines it is willing to embrace with respect to a particular sector. Members may also qualify or limit their commitments to: certain modes of supply (e.g. cross-border); a certain time frame; or with respect to particular types of regulatory elements (e.g. controls on the number of service suppliers).
The classification regime adopted by Canada for the purposes of listing service sector commitments under the GATS is the Provisional Central Products Classifications Code (CPC Code) that is kept by the United Nations Statistics Division.
A review of the schedule of commitments made by Canada indicates that no commitments have yet been made that specifically refer to water supply and water treatment. But it is clear that Canada is under considerable pressure to include core water supply services among those sectors fully committed under the GATS. Indeed the European Community has tabled proposals for the full commitment of environmental services including water for human use.
The European Community has also proposed establishing a cluster approach to environmental services negotiations which specifically includes potable water treatment, purification and distribution, including monitoring as one of the classes of services which it believes would benefit from such a negotiating approach. No doubt the EC has the strategic interests of its resident water service corporations, which now dominate global markets, firmly in mind. Two of Europes water giants are currently on the GVRDs short list.
But while Canada has made no commitment of water supply services, it has made commitments of water-related service sectors these include sewage treatment, as well as the design, project engineering and construction of dams, pipelines and other water infrastructure.
This means that the design and construction services supplied for the Seymour project are subject to virtually all GATS disciplines. Because these services may be provided by any one of four modes of service delivery, the GATS would preclude the stipulation of local preferences in the DBO contract. This constraint is similar to, but arguably broader than those engendered by the NAFTA Article 1106 concerning performance requirements. But unlike that provision of NAFTA investment rules, these GATS constraints apply to local government measures whether non-conforming or not.
The Privatization of Water Services
The privatization or pro competitive bias of the WTO is apparent throughout its discussion papers and background notes. For example, in listing explicit barriers to trade in environmental services, the WTO secretariat begins by identifying public service monopolies. Then, noting a trend towards privatization, the secretariat lists a number of barriers to foreign participation in the new markets created when public sector service delivery is abandoned. These include limitations on: foreign investment and the extent of foreign ownership; the type of legal entity required to provide the service; the scope of operations; the requirement to form a joint venture; and even local hiring requirements.
The privatization objectives of the GATS are woven into the fabric of this trade regime in a manner which is subtle and indirect. With one exception, no provision of the GATS squarely challenges the right of governments to choose or maintain public sector services. Rather, the corrosive influence of GATS disciplines is on the underlying policies, programs, regulatory and funding arrangements upon which the maintenance of public services depends. Key in this regard are the following provisions:
Article VIII - Monopolies and Exclusive Service Suppliers: which imposes many of the same constraints on public sector service providers as apply to government. This provision also requires that private sector service providers be compensated where monopoly rights are created with respect to the supply of service. This requirement may make it simply too costly to terminate the DBO contract for the purpose of reestablishing a public sector monopoly. Indeed, the compensation requirement might come into play even in the case where the GVRD simply fails to renew the contract at the end of its term.
Article XVI - Market Access: prohibits, inter alia, measures which restrict or require specific types of legal entity or joint venture through which a service supplier may supply a service. This would apparently preclude any specification that particular services be provided by governments, Crown Corporations or public agencies.
Article XVII - National Treatment: by failing to distinguish between private and public sector services suppliers, the GATS refuses to provide any latitude for policies, programs and funding arrangements which may explicitly or effectively favour public sector service providers.
Under Article XIII of the GATS, procurement measures are specifically excluded from certain GATS disciplines - Most Favoured Nation, Market Access and National Treatment - unless such services are purchased for commercial resale or to support the supply of commercial services. While this definition introduces some of the uncertainty that attends the definition of commercial, it nevertheless provides a safeguard for procurement measures from these particular GATS disciplines.
It is not clear however whether a public-private partnership to provide goods and services would qualify as government procurement. The very notion of partnership fits poorly with the arms length character of the typical purchase and sale procurement relationship. A more precise answer would require knowing the details of the contract the GVRD proposes to negotiate with its prospective private partner.
It is also important to note that most GATS disciplines apply to procurement measures notwithstanding this reservation. Furthermore, Article XIII stipulates that multilateral negotiations on procurement must proceed under the GATS.
As is the case for procurement, GATS rules explicitly establish a mandate for multilateral disciplines concerning subsidies. Article XV states that: Members recognize that, in certain circumstances, subsidies may have distortive effects on trade in services, and further stipulates that Members shall enter into negotiations with a view to developing the necessary multilateral disciplines to avoid such trade distortive effects. The development of disciplines concerning subsidies are part of the negotiating mandate established in the March 2001 negotiating guidelines.
The important point is that because subsidies are measures as defined by the GATS they must be allocated in accordance with National Treatment in sectors where specific commitments have been made. In such cases, any intention to restrict the availability of subsidies to public or not-for-profit services providers must be specifically indicated in a countrys schedule of commitments.
The scheduling guidelines make it clear that governments must list limitations on their national treatment commitments if they want to retain discriminatory public subsidies:
Article XVII [National Treatment] applies to subsidies in the same way that it applies to all other measures. Article XV (Subsidies) merely obliges Members to enter into negotiations with a view to developing the necessary multilateral disciplines to counter the distortive effects caused by subsidies and does not contain a definition of subsidy. Therefore, any subsidy which is a discriminatory measure within the meaning of Article XVII would have to be either scheduled as a limitation on national treatment or brought into conformity with that Article.
As noted, even in the absence of specific commitments, Most Favoured Nation Treatment must be accorded with respect to subsidy allocations in all sectors where no specific MFN exemption has been lodged. This means that if a subsidy is extended to a service provider from one country, it must be provided on a discriminatory basis to all WTO members. Moreover, Article XV(2) further stipulates that:
Any member which considers that it is adversely affected by a subsidy of another member may request consultations with that Member on such matters. Such requests shall be accorded sympathetic treatment.
Progressive Liberalization - Changing the Rules of The Game
This final point serves to underscore another important dimension of the challenge of anticipating the potential impact of GATS disciplines, and has to do with the dynamic and evolving character of this regime. Indeed, the objective of progressive liberalization is codified by Article XIX which provides:
In pursuance of the objectives of this Agreement, Members shall enter into successive rounds of negotiations, beginning not later than five years from the date of entry into force of the WTO Agreement and periodically thereafter, with a view to achieving a progressively higher level of liberalization. Such negotiations shall be directed to the reduction or elimination of the adverse effects on trade in services of measures as a means of providing effective market access. This process shall take place with a view to promoting the interests of all participants on a mutually advantageous basis and to securing an overall balance of rights and obligations.
It will be very difficult to sustain the public, not-for-profit character of water services in the face of any further expansion of the GATS regime.