TUESDAY 17 NOVEMBER 1998

MR JEREMY SMITH

  105. Good morning, Mr Smith. Unfortunately you are here on your own, and I say that because Mr Broadfish was to join us.
  (Mr Smith) Yes, he was. He sends his deep apologies, but he is unable to be here.

  106. It may seem a bit strange in some ways for us to invite the Local Government Association to talk about OECD negotiations, but we do realise that, as one of the organisations that is involved in the attraction of inward investment, you obviously have an interest in this, but I wonder if you can give us some indication of your concerns about the reasons why the multilateral agreement failed to secure common agreement at the OECD.
  (Mr Smith) Yes, with the caveat that we are not experts on the OECD or many of the international fora, though we do have some connection with them. From our perspective, I have to say that we came rather late, only a year ago, to the draft MAI which I think is one of our issues because the text at least in the later versions clearly refers to contracting parties ensuring that any entity to which it has delegated administrative or governmental functions, it has a duty to ensure that those entities do comply with the principles, and I think one of our points would be that we are not very happy at being an entity in this form of definition and I do not think it deals properly with sub-national governments in its definitional words, if I may say so. The other questions relate to the complexity or, perhaps more accurately, the opacity of the language. We have tried with one of the leading QCs in the land, aided by a barrister dealing with international law, to understand the implications of the MAI for local government, and I have to say I sit here at this table with the benefit of our QC's and lawyers' advice, and I am a barrister by background, and we have been around the issue and we do not yet understand the extent to which it would or would not affect us if it was enacted in the form that we have it today, with of course quite a few doubtful bits. Let me give you one practical example which is not in our memorandum, but I, as a chief executive in local government, has as part of my duties to tender waste authorities. We had an incinerator and we decided to establish a joint venture for this activity—this is a few years ago—and we invited companies to join in the joint venture and then we had a favoured one with whom we negotiated for a long time and with great complexity the final deal. Now, if you look under the prohibited performance requirements, you find a requirement that is prohibited is to enter into a joint venture. Now, I understand that fully if you are a country, say, China saying, "You can only come in if you form a joint venture", that is a general provision, but I think the language of this also applies to individual cases. Indeed it would be not sensible if it did not, so I am left with the doubt, even though the DTI officials say no, that is not the correct interpretation, as to whether if tomorrow, and this is a very real issue under the best value proposals, one of which of the various options is to do a joint venture, for example, if you only put out as a local authority a service by way of an offer of a joint venture, why is that not a prohibited performance requirement? I do not think that is what is intended by the text and the DTI do not think it is what is intended by the text, but I have read the wording quite carefully quite a few times and I do not see why it is not caught by that. I am giving that as one example of the sort of thing which is a trouble in the text. The other thing is that it is just too one sided an agreement, in our view, and it paid too little too late lip service to the range of other issues. We hear a lot about joined-up thinking in government and the White Paper on Local Government proposes imposing a duty on local government to promote the economic, social and environmental well-being of our communities, which I think is a wonderful new duty and I think that is an example of how you need to integrate the issues. That is easily said by me, but it is much harder to find the words and the things in practice in an agreement.

  107. Does this mean that you would be happy to see a new MAI or that you would be happier to see none at all because, as far as local government is concerned, your fear is that you would get embroiled in issues which it was the original intention of the MAI not to embroil you in? Would you be happiest if it went away?
  (Mr Smith) Yes.

  108. Thank you!
  (Mr Smith) Local government tries to speak with a consensus voice and, therefore, it is a cross-party issue and we have not taken a fundamental position. I honestly think that we are happy though that this one has gone away because of some of the problems I have said, that I think it is a very bad technical document, which it may not be for some, but in our field of citizens trying to understand laws that do impact significantly, this is a terrible agreement at the technical level. On the main principle, there is little opposition in British local government to the principle of non-discrimination on investment and that is not a problem for us.

  109. Did you press the DTI to seek to exempt all local authority decisions from the MAI?
  (Mr Smith) I have not gone down the reservation route because I thought it was clear to us that that would not succeed. Indeed to exclude all of local government is something that could be done at a technical level, but it would then, I think, be seen, from discussions with the DTI who have emphasised that successive British governments, this one as well, wanted very few or no reservations, it seemed to be that to say, "Please, can we have the whole of local government excluded" might not be the most successful kind of negotiating technique from our side, so I have been trying to concentrate on some of the other points.

  110. In the example you gave earlier, the DTI's line, as I understand it, was, "Don't worry, the MAI is not meant to be restricting you in this way on joint ventures". Now, as a barrister and having taken advice and so forth, you cannot quite get your head around how it is that local authorities are excluded from this, but, on the other hand, you have the DTI saying, "But the intention is not that local authorities be affected by this", so would it not be so much more simple to have a local government exemption and then you could get on with your business and foreign investors could get on with theirs?
  (Mr Smith) Yes, but that would have profound implications for everyone because one of the huge issues has been about sub-national entities in America and all over the countries negotiating and it would take out an enormous part of the actual effects of the treaty if it were entered into. Because if we did that, it seems a racing certainty that every other country would roar in with its reservations for the whole of sub-national government and then you would exclude vast tracts from the original intent of it. So it seems to me just not—as I say, I thought about that, and indeed it was one of the suggestions of our own barrister and we might have come to it if the other negotiations—because in a sense I was waiting to see, with this being a moving ball-game, we had not finalised the position as to whether we would ask for such a thing, which we might have done if we were dissatisfied on some of the other issues, including the expropriation problems.

  111. Do you believe that the exemptions that the United States got in relation to states, and okay, they are legislatures which we are not, but do you think that put them in a better position than you would have been in England and Wales?
  (Mr Smith) At one level yes, although I have to confess that I have not watched and studied all of the reservations at all levels, but there is a different tradition in the States and a different legal framework because of course we have the EU's legal system based on non-discrimination, whereas in America there is quite a strong tradition of protecting local business in the inner cities and that kind of thing and allowing that in a different way, but certainly my understanding is that there would have been more reservations. However, equally, it seems to me more important to address the principles of an international agreement than to deal with reservations as the major question. It seemed to me that there were real questions about what the major principles behind it were.

  112. Was that point discussed with the DTI? Was it not something that worried you and did you not say to them, "Look, the states in America are getting these exemptions, so should we not be getting something similar?"?
  (Mr Smith) Yes, but in our consultations and internal discussions, the principle of non-discrimination, which is actually not accepted by some of our colleagues, and I am dealing with world local government circles as well, there were different points of view on this one, on the degree of protectionism which should be permitted, whereas British local government has not argued for protectionism as a principle, so there is a difference in our perspective on it.

  113. Turning to the issue of procurement, the definition of investment in MAI included "rights under contracts, including turnkey, construction, management, production or revenue-sharing contracts", which the LGA felt might encompass public sector procurement. Do you have any evidence of local authorities' procurement decisions being based on nationality and, thus, likely to have fallen foul of the MAI?
  (Mr Smith) The first answer is no and that is of course the existing legal framework. Is there any risk of the MAI, being enacted, raising problems? The answer is potentially yes and I do not wish to exaggerate them, but let me give the example of the approved list system whereby companies are invited every few years to apply to be on an approved list by the local authority and then some are chosen from that. I can foresee issues that when there are invitations off the approved list, an argument could be made that this is not opening the procurement on an even, non-discriminatory basis across the world or to other contracting parties, so there are some examples where that is the case. We have got other issues. I note that one of the OECD negotiators, I think it was New Zealand, wanted an exclusion for government services procurement and, in particular, social services, and we do have contracts with social services providers in our localities which are sometimes tendered, where they are not provided in house, and sometimes are individually negotiated as well where that is proper to do so, so again I do not wish to exaggerate, but I have raised some possible examples of where I think the MAI, if enacted or if agreed in its present form, could have an impact on us. Frankly, we do not see why it is there at all in an agreement on investment; it is a different question, public procurement, altogether.

  114. And what about the move to best value—is that likely to cause any problems?
  (Mr Smith) Well, in principle, not hugely. I have given the example already though, just one area, of the joint venture which to me does remain and which is a real issue under best value. There is nothing in the principles of best value that require you to discriminate on the grounds of nationality, indeed on the contrary, but equally one of the risks is that certain forms of decision-making and invitation to tender do give rise to arguments that X company should have been invited to tender.

  115. What about the police authority deciding it does not want to buy any non-EU cars—do you think a decision like that would founder on the rocks of the MAI?
  (Mr Smith) Yes, I think it would if the MAI was entered into because obviously that would be non-discriminatory in terms of EU law, but such a decision would exclude others. I have never been personally involved in police authorities and it has never come up, so I do not know whether this is a real problem of a need to have a particular form of car, but there are theoretically and possibly practically some questions where the general non-discrimination principle that applies within the EU could still be discrimination within the EU against others which would be caught by definition.

  116. Say, somebody puts a veto on the Lord Mayor's Lexus.
  (Mr Smith) There is under the existing law a duty not to take into account non-commercial considerations, so you would have to be able to demonstrate reasons beyond the fact.

  Chairman: It was just one which came up.

  117. In your memorandum you argue that "the right to raise regulatory standards should be asserted as a fundamental principle in the main text" of any future MAI. Can you give us an example of local government regulations which could lead to claims of expropriation by firms as a result of the MAI?
  (Mr Smith) I think the best thing is to use the example of the Ethyl Corporation, not because I know or necessarily think that the merits are all in one direction on that one, frankly I do not know enough about it, but the principle applies, namely there is a company which may be a virtual monopoly in its field which has invested in such and such a technology and you then have a raising of environmental standards which, by definition, impacts on that one particular firm, so that is one type of example of where raising standards has a particular impact, maybe of significant substance, on a particular investor. Equally, you could have changes in zoning policies in local government for planning purposes, so there are those sorts of example where it is absolutely clear to me that there can be decisions made that are general in nature, but which do impact on one or a small number of business entities in a greater way than they do on most others and that is where the argument around expropriation at least theoretically and maybe very really does exist. So that is my answer.

  118. How should you respond to business concerns that some regulations might be disguised barriers to foreign investment or might be based upon inadequate or inaccurate scientific advice? Does the Government not have a responsibility not to regulate except as a last resort?
  (Mr Smith) If you enter into international agreements not to discriminate and you do it by means of a sham, then providing it can be demonstrated that there is a sham, then there is a good argument for an investor arguing against that point. In other words, there has to be genuineness built into it, but British law has dealt with shams in all sorts of contract things before, so it is a problem of evidence, not a problem of principle, but short of that, there are still cases where you do get a differential impact which we think could give rise to it. However, there is another point, that even if at a technical level international law says, "That is not a problem", we are dealing with public laws here, we are not dealing with private stuff just for business people, and that is one of my major issues about the MAI. When we saw the new text on regulatory standards that were accepting the points that the NGOs and ourselves and others were making, they do not assert the right to raise standards as a principle, but they add a little interpretative footnote into it and this is not the way to make international treaties.

  119. Can I just ask what the DTI's response has been to this issue of local government regulations and the possibility of claims for expropriation and so forth? This has obviously been a central LGA point in the past.
  (Mr Smith) Yes.

  120. When you have put this, the kind of examples you have given to us this morning, to the DTI, what kind of response have you had from them?
  (Mr Smith) The response has been that the Government accepts the point, because it was around the time we started making the point, and I am not alleging cause and effect, that it started to move generally because, I think, of wider concerns being expressed, and we were then given the information very helpfully of what the proposals were that were taking place inside the negotiations, so that was very helpful. However, I still remain concerned about the form in which the answer has come through at the point where the MAI has fallen away.

  121. One last point: if the local authority was cast in a regulatory role and it had its decision challenged by a big multinational coming into an area and not behaving itself and they decided to go the distance in legal terms, do you not think that perhaps a small to medium-sized authority would think about taking them on if the costs of the legal action were going to be disproportionate?
  (Mr Smith) Yes, one of the arguments for a regional or large city-wide government is that it tends to be able to put more resource to this kind of thing. Local authorities have taken on large corporations and clearly you have to balance the cost and what occasionally happens if a case clearly raises a point of principle is to seek support from other local authorities. It is not a totally satisfactory position, as the imbalance of power is a reality in any legal system, but again it is better to have an imbalance in a transparent and public and consistent legal system than one that, for all of its merits in terms of dealing with private individual disputes, arbitration, is not right for resolving issues that impact on the public domain and the public interest.

  Chairman: Thank you. Well, I think that covers all our concerns this morning, Mr Smith. Thank you very much for coming and giving evidence.