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Canada - Bahrain

Initial Environmental Assessment (EA) of the Canada-Bahrain Foreign Investment Promotion and Protection Agreement (FIPA)

Table of Contents

1. Executive Summary

This report outlines the results of the Initial Environmental Assessment (EA) of the Canada-Bahrain FIPA negotiations. Negotiations commenced in February 2009 and an agreement is expected early in spring 2009. Canada’s model FIPA is being used as the basis for the discussions.

The EA of a FIPA follows the process outlined in the 2001 . The process focuses on the likely environmental impacts (both positive and negative) that could result from this agreement and calls for three potential phases of EA; the initial, draft and final assessments. The middle, or draft, phase is not undertaken if the FIPA is not expected to generate significant economic effects which result in environmental impacts in Canada. However, a Final EA report is always undertaken and seeks to demonstrate how environmental considerations informed and were integrated into the decision-making process.

The Initial EA of the Canada-Bahrain FIPA attempts to identify the likely economic effects of the FIPA and, on this basis, draw conclusions about the potential environmental impacts in Canada. The report also considers the impact of the FIPA on the ability of Canada to regulate in the interest of environmental protection. Given the strong commitment to public consultation pursuant to the Framework for Conducting Environmental Assessment of Trade Negotiations, stakeholder input was taken into account wherever possible throughout the process.

Over the long term it is anticipated that the FIPA will contribute to the development of a favourable business climate, conducive to the growth of two-way investment. However, actual increases in investment flows may be difficult to precisely measure or track, and will depend upon many factors, including the financial capacity of individual investors and their assessment of opportunity and risk. It is therefore difficult to assess the economic impact of FIPAs and any consequent environmental effects as these impacts are realised over time, whether in the form of enhanced investment opportunities or improved bilateral relations in general.

In general however, the results of the Initial EA indicate that significant changes to investment flows into Canada are not anticipated as a result of these negotiations. As such, the economic effects and the environmental impact in Canada are expected to be minimal. However, this report does discuss the likely environmental impacts associated with sectors in which Bahraini investors have indicated interest.

The Canada-Bahrain FIPA will not have a negative effect on Canada’s ability to develop and implement environmental policies and regulations. In fact, the provisions of the agreement safeguard Canada’s ability to maintain and expand the current framework of policies, regulations, and legislation for protection of the environment in a manner consistent with its domestic and international obligations.

The Government of Canada welcomes comments on this Initial EA to be provided by July 9, 2009. Based on the information available, a Draft EA will not be carried out as the economic effects and potential environmental impact in Canada are not expected to be significant. The issuance of the Final EA is expected to coincide with the signing of the FIPA; input received through public and stakeholder consultations will be considered and integrated as appropriate in the Final EA report. Please submit comments to: consultations@international.gc.ca.

2. Introduction

A FIPA is an international treaty that places binding obligations on host governments regarding their treatment of foreign investors and their investments. By setting out clear rules and an effective enforcement mechanism, a FIPA provides a stable legal framework to promote and protect foreign investment. It typically sets out a range of obligations pertaining to non-discriminatory treatment, expropriation, transfer of funds, transparency, due process and dispute settlement, among others.

While Canada negotiates FIPAs in order to protect Canadian investment abroad, the disciplines are reciprocal and serve to reinforce Canada’s image as a stable and predictable destination for foreign investment. In this respect, FIPAs help enhance two-way investment flows between signatory countries.

In the absence of a FIPA, Canadian investors rely primarily on host country laws and institutions for protection, which adds a variety of risks to their ventures. For example, a host country may change domestic laws after an investment is made in a way that discriminates against foreign investors. In cases where a policy change discriminates against a Canadian investor, for example, and causes harm to its investment, a FIPA can be a valuable instrument of protection for Canadian investments abroad.

Emerging economies and those in transition are increasingly important destinations for Canadian investment abroad. By specifying the rights and obligations of the signatories regarding the treatment of foreign investments, a FIPA contributes to a predictable investment framework and engenders a stable business environment.

From the perspective of developing countries, foreign investment represents an important driver of economic development. Developing countries need and want the capital, advanced technologies and know-how that investment brings and want to ensure that investment flows predictably to their countries. FIPAs signal that these countries are interested in creating an investment regime that is conducive to attracting foreign investment.

In 2003, the Government approved a FIPA model that serves as a template for Canada’s discussions with investment partners on bilateral investment rules. More background information on Canada’s FIPA program is also available in Annex I of this Initial EA.

The Canadian government is committed to integrating sustainable development into domestic and foreign policy, and the environmental assessment of trade and investment negotiations is one mechanism for doing so. The environmental assessments (EAs) of trade negotiations use a process that requires interdepartmental coordination along with public and stakeholder consultations, including provincial and territorial governments. The 2001 Framework for the Environmental Assessment of Trade Negotiations details this process. It was developed in response to the 1999 Cabinet Directive on , which requires that all initiatives considered by Ministers or Cabinet must be assessed if implementation of the proposal may result in important environmental effects, either positive or negative. Detailed guidance for applying the Framework is contained in the Handbook for the Environmental Assessment of Trade.

3. Background on the EA Process

The Framework provides a methodology for conducting an EA of a trade or investment negotiation. It is intentionally flexible so that it can be applied to different types of negotiations (e.g., multilateral, bilateral, regional) while ensuring a systematic and consistent approach to meet two key objectives.

The first objective is to assist Canadian negotiators to integrate environmental considerations into the negotiating process by providing information on the possible environmental impacts of the proposed agreement. As such, negotiators and environmental experts are involved in the EA and work proceeds in tandem to the negotiations.

The second objective is to respond to the environmental concerns expressed by the public. The Framework contains a strong commitment to communications and consultations throughout each EA of a trade or investment negotiation.

Three phases of assessment are generally undertaken: the Initial, Draft, and Final EA. These phases correspond to progress within the negotiations. The Initial EA is a preliminary examination to identify key issues. It occurs earlier on in the negotiations. The Draft EA builds on the findings of the Initial EA and requires detailed analysis. A Draft EA is not undertaken if the negotiation is not expected to yield large economic changes. The Final EA takes place at the end of the negotiations. At the conclusion of each phase, a public report is issued with a request for feedback.

A consistent analytical methodology is applied during each phase. The Framework recognizes that economic and environmental effects can relate to changes in the level and pattern of economic activity, the type of products traded, technology changes, as well as regulatory and policy implications.

The Government of Canada has completed Initial EAs of the World Trade Organization (WTO), Free Trade Area of the Americas (FTAA), Singapore, and CA4 countries (Guatemala, Honduras, Nicaragua, El Salvador) trade negotiations, Canada-Peru FIPA as well as Canada-India FIPA. Initial EAs are underway for the Canada-Korea FTA and Canada-EU Trade and Investment Enhancement Agreement. The Draft EA for the WTO negotiations is also underway. Final EA reports have been issued for the Canada-Peru FIPA and for the addition of a government procurement chapter to the Canada-Chile Free Trade Agreement.

The Government of Canada will continue to apply the Framework to future trade and investment negotiations. Information on the EAs Canada has conducted are available on our website.

The findings of this Initial EA have been communicated to Canada’s lead negotiator for the Canada-Bahrain FIPA, to the Environmental Assessment Committee (EAC) for the Canada-Bahrain FIPA, the government of Canada’s interdepartmental Steering Committee for the Environmental Assessment of Trade Negotiations. The results will also be used to inform all of the above, as appropriate, for the final negotiations on a Canada-Bahrain FIPA. Likewise, any comments the public has on this report will inform the Final EA, and be circulated to key contacts within the Government of Canada. EAs of all FIPAs will continue to evolve based on our experience and feedback from experts and the public.

4. Invitation to Submit Comments

In keeping with the Framework, an Environmental Assessment Committee (EAC) has been formed to undertake the analysis of the FIPA. Coordinated by the Department of Foreign Affairs and International Trade Canada, the Canada-Bahrain FIPA Environmental Assessment Committee includes representatives from other Federal government departments, including Environment Canada and the Canadian Environmental Assessment Agency. An important responsibility of the EAC is to oversee the solicitation of input from provinces and territories, stakeholders representing business, academics, and non-governmental organization, as well as the general public.

As part of its commitment to an open and transparent process, the Government has opened this Initial EA for public comment from May 12-July 9, 2009. Feedback on the likely economic effects and the likelihood and significance of resultant environmental impacts are especially welcome. Please bear in mind that the assessment is focused on the possible environmental impacts in Canada. Transboundary effects may be considered where such effects are anticipated to have significant impact, either positive or negative, upon the Canadian environment.

Comments on this document may be sent by email, mail or fax to:

Consultations and Liaison Division (BSL)
Initial Environmental Assessment of the Canada-Bahrain Foreign Investment Promotion and Protection Agreement (FIPA)
Department of Foreign Affairs and International Trade Canada
125 Sussex Drive
Ottawa, Ontario
K1A 0G2

Fax: (613) 944-7981
Email: consultation@international.gc.ca 

5. Analysis of the Canada-Bahrain FIPA

Negotiations commenced in February 2009 and an agreement is expected early in spring 2009. Canada’s model FIPA is being used as the basis for the discussions. Once negotiations have been concluded, the parties must complete their respective processes leading to signature and ratification before the treaty enters into force.

a) Identification of Likely Economic Effects

The first step in the EA process is the identification of the likely economic effects of the FIPA. This process typically begins with a review of official data on the level of known Bahraini investment into Canada. Unfortunately, no official statistics are available in this regard. Bahrain has neither disclosed information concerning its foreign assets, nor been specific about its investments in Canada. This paucity of data can occur for a number of reasons, including: the sample size is so small that in reporting the aggregate data it may be possible to identify individual investors; challenges associated with the reporting/tracking of investment flows; or investment flows that are extremely low/non-existent. Based on a review of unofficial data and anecdotal evidence gathered from conversations with Bahraini officials, it appears that the third explanation applies with respect to Bahraini investment into Canada.

Trade between Canada and Bahrain is modest in both directions, totalling $49 million in 2007. Canadian exports (primarily iron ores, machinery and paper) were worth $40.6 million, while imported goods from Bahrain (primarily consisting of aluminum) totalled $8.4 million. Bahraini officials expect that Bahraini investments in Canada could initially target the aluminum and petrochemical sectors because of existing Canadian-Bahraini trade in these areas. Bahraini investors could be potentially interested in investments related to oil sands extraction technologies in order to develop their own industry.

The oil and gas sector may be of particular interest to Bahraini investors. Canada is a leader in enhanced oil recovery, the heavy oil technology, and cutting edge technologies to reduce the environmental impact of oil and gas exploration and production activities. Potential opportunities exist for Canadian companies both to conduct business in Bahrain, and to attract Bahraini investment for expansion and research and development. The environmental impact of research and development investments may be positive if technological improvements are sought to mitigate the current environmental impacts of oil extraction. It is not anticipated that any increase in negative environmental impacts would be observed in the future extraction of Canadian oil sands as a result of this type of investment. Extraction methods with negative environmental impacts greater than those methods currently in use are unlikely to be approved under Canadian federal or provincial legislation, regulations and oversight processes. Furthermore, the FIPA requires Canada not to lower its environmental standards in order to attract investment.

Similarly, no official data concerning the level of Canadian investment in Bahrain is available. Based on a review of unofficial data and anecdotal evidence, it appears that the level of Canadian investment in Bahrain is minimal. However, Bahrain’s rapidly expanding economy and increasing openness to FDI offers significant investment opportunities for Canadian investors, particularly in relation to oil and gas services, construction, health industries, and education services.

A high-standard FIPA will help continue to achieve investment potential in both countries by improving investor confidence. While the existence of a FIPA should be a positive and important factor in investors’ decisions on whether to invest in the territory of the other party, it will be one of many factors. Large changes in investment patterns are not expected to result from these negotiations.

b) Identification and Assessment of Likely Environmental Impacts in Canada and the Context for these Impacts

The Framework calls for the identification and assessment of the environmental impacts that could stem from the anticipated economic effects of the FIPA. The likelihood and significance of such impacts would depend on the degree of increase in investment, the sectors targeted for investment, and the measures in place to protect the environment in relation to those activities.

As noted above, Bahrain’s stock of direct investment in Canada is believed to be minimal. While over the long term the FIPA is anticipated to contribute to a favourable business climate conducive to growth of two-way investment, significant new flows of investment into Canada as a result of the FIPA are not anticipated. Increases in investment flows into Canada from Bahrain will depend upon many factors, including the financial capacity of individual investors and their assessment of opportunities and risks. There are no specific investments known to be dependent on the FIPA’s conclusion, nor is there a direct known correlation between conclusion of FIPAs and the expansion of investment. Given the openness of Canada’s broader investment regime, significant new flows of investment from Bahrain into Canada attributable to the FIPA are not anticipated. The FIPA will not open any new sectors to Bahraini investment, nor will it provide preferential market access beyond the level currently available to Bahraini investors. Therefore, it is expected that the environmental effects of the FIPA on Canada will be minimal.

Oil and Gas

Given Bahrain’s potential investment interest in the oil and gas sector, it was decided that mention of the environmental impacts associated with oil sands should be included to ensure that decision-makers are aware of the potential environmental impacts. There are a number of environmental issues associated with oil sands development, with challenges related to cumulative impacts for a number of environmental parameters such as global warming/greenhouse gas (GHG) emissions, water usage and water quality, aquatic and terrestrial habitat destruction and fragmentation, and land reclamation as well as growing infrastructure and socio-economic issues at the forefront of public concerns. Water usage issues center around the potential negative impact on the aquatic ecosystem, the removal of water from the watershed (surface and groundwater) and the large tailings ponds that are being created.

In order to mitigate some of these impacts, Canada has recognized carbon capture and storage (CCS) as the most viable emission-reducing technology available to address greenhouse gas emissions. In response to this, the Government of Canada, in its 2009 budget, allocated $1 billion over five years for clean energy research development and demonstration projects, including capture and storage; and recently approved $140 million for eight CCS projects. The Government of Alberta also recently announced a $2 billion fund to accelerate the development of the province’s first large-scale, commercial CCS projects.

Fisheries and Oceans Canada and the Alberta Environment Ministry also recently released the Water Management Framework for the lower Athabasca River, designed to protect its ecological integrity during oil sands development. Furthermore, the Government of Canada works with industry to develop and commercialize new technologies and processes to deal with oil sands tailings, in particular, to significantly reduce the amount of water stored on oil sands properties as a result of the extraction operation.

All oil and gas operations in Canada are regulated through a range of federal and provincial legislation, including the environmental assessment of new developments and expansions. Federal and provincial agencies participate in a number of multi-stakeholder, consensus-based regional initiatives set up to address environmental issues related to oil sands development. Recommendations arising from these initiatives are considered in directing government policy and priorities for the region.

Mining

Each stage of the mineral production process (exploration, extraction, processing, closure, and abandonment) has the potential for significant adverse environmental effects (e.g., air emissions, surface and groundwater flow and quality, soil contamination, habitat destruction and fragmentation). The temporal and spatial scale of these impacts varies significantly, from temporary and localized to long term and extensive, depending on a number of factors, such as project design, methodologies, technologies used, and mitigation measures implemented.

Canada has a regulatory framework to address environmental and others impacts from mining. The environment is a shared responsibility between the federal and provincial government. Therefore, all mining operations in Canada are regulated through federal and provincial legislations, including the requirement of an environmental assessment and other impacts prior to approval of the development of new mines and mine expansions.

Finally, it should be noted that the Canada-Bahrain FIPA will not impact on Canada’s ability to develop and implement environmental policies and regulations. Canada will safeguard its ability to maintain and expand the current framework of policies, regulations, and legislation for protection of the environment in all sectors in a manner consistent with its domestic and international obligations.

c) Policy and Regulatory Context

Canada’s EA of Trade methodology, as outlined in the Framework, calls for consideration of the potential policy and regulatory effects of the FIPA. Foreign investors in Canada are bound by the same environmental protection regulations that govern the activities of domestic investors. Proposed projects resulting from inward investment would be subject to applicable environmental assessment legislation, including the Canadian Environmental Assessment Act and provincial/territorial environmental assessment regulations.

Recent revisions to the Government of Canada’s FIPA model have clarified governments’ right to regulate in the public interest. The model includes a general exception that permits a Party to take measures necessary to protect human, animal or plant life or health, the environment and safety, or measures primarily aimed at the conservation of exhaustible natural resources, provided that these measures are not applied in an arbitrary or unjustifiable manner and are not disguised restrictions on trade or investment. In addition, the model clarifies the rules governing direct and indirect expropriation with regard to governments’ right to regulate. FIPA parties may also reserve existing laws and regulations such that they are not subject to specified obligations of the treaty, and they may reserve sensitive sectors for future regulation. Finally, the revised FIPA model strengthened a clause on “not lowering standards.” Specifically, this clause recognizes that it is inappropriate to encourage investment by relaxing domestic health, safety or environmental measures. In the event a Party has offered such encouragement, the other Party may request consultation.

The revised FIPA model is serving as the basis for Canada’s position in the Canada-Bahrain negotiations. The model includes provisions which safeguard Canada’s ability to maintain and expand the current framework of policies, regulations, and legislation for protection of the environment in a manner consistent with its domestic and international obligations. As a result, the Canada-Bahrain FIPA will not impact on Canada’s ability to develop and implement environmental policies and regulations.

6. Other Environmental Considerations – Transboundary Effects

Canada’s Framework for Conducting EAs of Trade Negotiations calls for national assessments, and allows for consideration of transboundary, regional, and global environmental impacts if they have a direct impact on the Canadian environment. Stakeholders have noted that as one of the main sectors of likely interest for Canadian investors in Bahrain is oil and gas, an analysis of potential changes in transboundary air pollution due to Canadian investment is relevant. However, it must be noted that this FIPA does not allow Canadians to invest in oil and gas exploration and production in Bahrain, areas of investment which are restricted to Bahraini and Gulf Cooperation Council (GCC) nationals. Canadian investors are restricted to oil and gas services. Given the current low level of Canadian investment in the Bahraini oil and gas sector, it is impractical to estimate any impacts on climate change, greenhouse gas emissions, or changes to particulate matter levels, background ozone levels, or ozone precursors such as nitrous oxide or sulphur dioxide, which will result as a consequence of investments related to this agreement.

Furthermore, it is outside of the scope of this study to assess the potential for positive or negative environmental impacts that could potentially occur in Bahrain as a result of these negotiations, or to judge the measures in place within Bahrain to enhance or mitigate such impacts.

7. Stakeholder Feedback

The notice of intent to conduct an EA of the Canada-Bahrain FIPA was published on the website of the Department of Foreign Affairs and International Trade Canada on February 12, 2009. The notice included an invitation to interested parties to submit their views on the likely environmental impacts of the Canada-Bahrain FIPA on Canada. There were no comments received on the Notice of Intent. We have however received general comments on conducting EAs of FIPAs through other consultation mechanisms.

a) Canada/Bahrain Environmental Cooperation Activities

While it is outside the scope of this study to analyze the potential environmental effects of the Canada-Bahrain FIPA on Bahrain, we have reviewed the information available on past Canada-Bahrain environmental cooperation activities. Currently, there are no government-led Canada-Bahrain environmental cooperation activities.

b) Third Party Input

In revising its model FIPA and expanding its FIPA program, the Department of Foreign Affairs and International Trade Canada conducted a number of workshops and public consultations concerning FIPAs at which the following issues were raised:

• the relationship between investment and environmental regulation in the country with which Canada is negotiating;
• challenges associated with determining how investment will change as a result of the negotiation;
• options for improving FIPA EA consultation mechanisms and options for integrating environmental considerations into negotiating and policy development processes.

As outlined in the Handbook for Conducting Environmental Assessments of Trade Negotiations, consultations were also held with the Environmental Assessment Advisory Group (EAAG), an external group of experts on trade and environment matters. These consultations allowed the Department to solicit comments and guidance from these experts. The feedback that was received informed the analysis for this assessment and was shared with the interdepartmental Environmental Assessment Committee established for the Canada-Bahrain FIPA.

8. Conclusion and Next Steps

The Initial EA concludes that significant changes to investment in Canada are not expected as a result of the Canada-Bahrain FIPA negotiations. As such, the environmental impacts on Canada are not expected to be significant.

Following the receipt of public comments on the Initial EA, the Final EA will be completed taking into account the consultative findings. In the light of the Initial EA’s conclusions regarding the likely economic activity and resultant environmental impacts in Canada, preparation of a Draft EA is deemed to be unnecessary. The release of the Final EA will coincide with the signing of the agreement.

Annex 1 - Canada’s FIPA Program

a) Background on Canada’s FIPA Program

A FIPA (Foreign Investment Promotion and Protection Agreement) is a bilateral agreement aimed at protecting and promoting foreign investment through legally-binding rights and obligations.

FIPAs accomplish their objectives by setting out the respective rights and obligations of the countries that are parties to the treaty with respect to the treatment of foreign investment. Typically, there are agreed exceptions to the obligations. FIPAs seek to ensure that foreign investors will not be treated worse than similarly situated domestic investors or other foreign investors; will not have their investments expropriated without prompt and adequate compensation; and will not be subject to treatment lower than the minimum standard established in customary international law. Additionally, in most circumstances investors should be free to invest capital and repatriate their investments and returns.

Canada’s policy is to promote and protect investment through a transparent rules-based system in a manner that reaffirms the right of Governments to regulate in the public interest, including developmental interests. As an instrument that supports the rule of law and fosters fairness, transparency, non-discrimination and accountability, a FIPA encourages good governance. A FIPA also promotes sustainable development principles by exhorting Governments not to lower health, safety or environmental measures in order to attract investment.

Canada began negotiating FIPAs in 1989 to secure investment liberalisation and protection commitments on the basis of a model agreement developed under the auspices of the OECD (Organization for Economic Cooperation and Development). In 1994, Canada introduced a FIPA model incorporating the enhanced investment protection afforded under the NAFTA (North American Free Trade Agreement). Canada signed 5 agreements using the OECD model and signed 18 FIPAs based on the 1994 model for a total of 23 FIPAs to date.

b) Canada’s 2004 FIPA Model

In 2003, Canada began updating its FIPA model to reflect lessons learned from its experience with the implementation and operation of the investment chapter of the NAFTA. The principal objectives of this exercise were to enhance clarity in the substantive obligations; to maximize openness and transparency in the dispute settlement process; and to discipline and improve efficiency in the dispute settlement procedures. Canada also sought to enhance transparency in the listing of reservations and exceptions from the substantive disciplines of the Agreement.

In May 2004, Canada's new model for the negotiation of FIPAs was published on the Department of Foreign Affairs and International Trade Canada’s website. The new FIPA model provides for a high standard of investment protection and incorporates several key principles: treatment that is non-discriminatory and that meets a minimum standard; protection against expropriation without compensation and restraints on the transfer of funds; transparency of measures affecting investment; and dispute settlement procedures. The new model serves as a template for Canada in discussions with investment partners on bilateral investment rules. As a template, the provisions contained therein remain subject to negotiation and further refinement by negotiating parties. Thus, although all FIPAs can be expected to follow this approach, it is highly unlikely that any two agreements will be identical.

Canada’s FIPA negotiating program is intended to reflect the priorities of Canadian investors. Canada considers potential FIPA partners based on the following factors: likelihood of engagement; commercial and economic interests; lack of investor protection; trade policy interests; and political/developmental interests.

c) Environmental Issues Related to the new FIPA Model

Underlying Canada’s FIPA model are renewed commitments to transparency, including with respect to crosswalks between investment agreements and environmental issues. For instance, Canada seeks commitments whereby Parties would agree to publish laws, regulations and other procedures respecting any matter covered by the FIPA. We also seek to allow Parties an opportunity for prior comment on future legislation covering inward investment.

Canada also recognizes the benefits of transparency with respect to procedural arrangements associated with our investment agreements. For example, this includes investor-state dispute settlement procedures, whereby Canada seeks to facilitate third-party (amicus) submissions to tribunals.

Canada’s FIPA model incorporates various safeguards aimed at protecting Canada’s right to regulate for legitimate public welfare objectives. It also includes a statement in the preamble on the consistency of the agreement with sustainable development, in addition to general exceptions with related to protecting human, animal, or plant life or health similar to GATT Article XX/GATS Article XIV.

The revised FIPA model clarifies Canada’s position that non-discriminatory measures, such as a regulation, designed and applied to protect legitimate public welfare objectives such as health, safety and the environment do not constitute an indirect expropriation. Unless a measure is so severe that it cannot be reasonably viewed as having been adopted and applied in good faith, a non-discriminatory environmental regulation that may adversely affect an investor would not constitute indirect expropriation.

The revised FIPA model includes a clause on “not lowering standards,” whereby signatories recognize that it is inappropriate to attract investment through lowering health, safety, and environmental standards. Specifically, this clause recognizes that it is inappropriate to encourage investment by relaxing domestic health, safety or environmental measures. In the event a Party has offered such encouragement, the other party may request consultation.