1.  The Local Government Association for England and Wales (LGA) represents all local authorities—county, district, metropolitan and unitary—within the two home countries. The LGA has discussed the proposed Multilateral Agreement on Investment (MAI) twice within our Policy and Strategy Committee, and the MAI has also been considered from a specifically environmental perspective by the Local Agenda 21 Steering Committee, which brings together other partners with LGA councillors.

  2.  The LGA has not sought to reach a view on the underlying philosophy of the MAI. To do so would, we believe, go beyond our remit as the united voice of local government. A number of individual authorities have however indicated their opposition to the MAI. The LGA has sought to examine the MAI by asking, if there is to be such an agreement, are there changes necessary to protect the proper interests of local government? These issues include however some important points of principle, including the availability of the disputes procedure to individual investors as well as states. Our key points for the future are set out at paragraph 15 below.

  3.  Whilst we have some major concerns, we would wish to express our thanks to DTI officials who have been helpful and courteous in assisting us with the difficult task of trying to understand how the text of the MAI would relate to and affect local government. We are also grateful to Ministers for responding to issues raised in correspondence from the LGA.

  4.  We recognise from the outset that in most respects, the MAI if ratified would be unlikely to have significant direct effects on the current practice of local government. Thus, local government generally welcomes inward investment, and treats potential investors in a non-discriminatory way, irrespective of the "national" origin of the investor. We do not generally impose performance requirements of the kind that the MAI would prohibit. Insofar as the MAI relates to public procurement (see paragraph 8 below), UK and European Union law generally impose a non-discriminatory framework. We have not dealt directly with the issue of free movement of investment capital.

RAISING REGULATORY STANDARDS

  5.  The LGA does however have a number of key concerns relating to the MAI. First amongst these is the need to ensure that governments, central, regional or local, may safely, within their competences, raise or change environmental or other regulatory standards without fear of the threat—or reality—of actions under the disputes procedure by investors that such steps amount to expropriation. Earlier drafts of the MAI were, in our view, gravely flawed by the lack of clarity on this point.

  6.  Our concern has been increased by the use of a similar disputes procedure under the North American Free Trade Agreement (NAFTA) by the Ethyl Corporation in relation to Canada. It is not for us to go into the rights or wrongs of the particular case (information on which appears less than fully transparent)—rather, it highlights the risk that some legitimate actions by local or other governments could be challenged on a similar logic.

  7.  Regulatory action is one of the basic roles of local government, and we must (like central government) insist on the right to raise and change standards according to changing circumstances. We have welcomed therefore the indication (which we understand to be fully supported by the UK government) that the MAI negotiators have agreed the principle of including clarification in the MAI that governments may raise or alter regulatory standards, without an investor being able to claim expropriation. We have asked to be consulted on the proposed wording. We do not consider that an interpretative note would be sufficient to deal with this key issue (as appears to be the recent intent). The right to raise regulatory standards should be asserted as a fundamental principle in the main text.

PUBLIC PROCUREMENT

  8.  Our second main issue has been to clarify the application (or not) of the MAI to public procurement per se. In our view, it would be curious if an agreement which expressly relates to "investment" were also to include, due to an extraordinarily wide definition, the separate issues that relate to public procurement. And indeed, public procurement is already subject to international agreement. Yet we still remain unclear how far the very broad definitions of investment in the MAI are intended to deal with public procurement per se, in the absence of other normal insignia of investment. The definition of investment includes "rights under contracts, including turnkey, construction, management, production or revenue-sharing contracts", and claims to money and to performance. Our uncertain conclusion is that the text of MAI would apply to procurement per se.

  9.  As indicated above, in most respects, UK and EU law require local government, in carrying out their public procurement activities, to comply with the non-discrimination principle. But since the MAI, at least in principle, allows "investors" to take actions for alleged breach outside normal legal systems, the breadth of definition is a matter of concern. Local government properly lets contracts for services, often of modest financial quantum, without full tenders, including in some cases by individual negotiations. The principles of administrative law apply, and the UK courts can be used in cases of legal challenge. We cannot accept that new lines of attack on decision should be capable of being opened by tenderers, in the guise of investors, through the disputes procedure.

  10.  Thus, our present understanding of the effect of the MAI—which is far from complete in this area despite our (and leading counsel's) best efforts to understand its meaning—is to expose local government processes and decisions to a further layer of potential challenges. We do not wish to exaggerate the effect, but to date have seen no justification for allowing an agreement on investment to stray so far in its coverage as to encompass, as it appears to do, the entirety of public procurement. We note that at least one negotiating party has raised this issue, in relation to the procurement of services.

INVESTOR-STATE DISPUTES PROCEDURE

  11.  It is our understanding that local governments could not, at least in the context of the UK, be directly "sued" by an investor under the Investor-State disputes procedure under MAI. Nonetheless, the acts or omissions of local governments could be the subject of challenge by an aggrieved individual investor. Though we hope that the local authority in question would be consulted by the UK government, and might be called to explain their act, there is no transparent process provided for under MAI. Of course, if an investor believes that a governmental body has acted illegally in terms of UK or EU law, they can take action in the normal courts. The issue here relates to allegations not of illegality under existing law, but of a breach of the MAI that would involve no current illegality.

  12.  This raises serious concerns of a general nature. We recognise that there are other treaties that provide for persons (individuals or corporate) to take procedings. The European Convention on Human Rights is an example from a different sphere. In that case, however, there is a transparent formal process, and a special judicial system, for handling disputes. This is not the case with the MAI disputes procedure, despite the enormous breadth of its subject-matter.

  13.  We believe this gives rise to a general question as to whether this is a desirable trend, consistent with priciples of democracy, due process and transparency. It is our present view that international treaties should be cautious in giving rights (but no obligations) to special classes of "person", outside all normal legal systems, that are enforceable directly by those individuals. We do not believe that the long-term consequences of this trend have been sufficiently thought through. At present, in the context of the MAI (or any successor) we would argue that there should be no Investor-State disputes procedure.

THE FUTURE

  14.  At the time of writing this memorandum, it appears that the MAI is unlikely to proceed. However, there is the possibility that the issues will be raised again, possibly in the context of the World Trade Organisation. We do not consider it is for us to express a firm view on this, though we would wish to pose the question whether the WTO is the right forum for such issues.

  15.  If future consideration is to be given, in whatever forum, to a new treaty dealing with investment issues of the kind raised in the MAI, we would make the following proposals, arising from our consideration of the MAI:

—  the process should be transparent and consultative;

—  the text should be more easily capable of understanding by citizens;

—  there should be an appropriate balance between the objectives of investment and those of sustainable development;

—  there should be an explicit recognition of the right by governments at all levels to raise or change regulatory standards;

—  the definition of investment should be a reasonable one, and not be so broad as to encompass all of public procurement, for example; and

—  there should be a fundamental rethink of the disputes procedure, and in our view an exclusion of the Investor-State disputes procedure.