CTN Blog: "Balancing investors’ and consumers’ rights along the Belt and Road"

By Anatole Boute

For many countries along the Belt and Road Initiative (BRI), Chinese investments are a welcome source of capital and technology to help address urgent infrastructure requirements. At the same time, the BRI is increasingly criticized for creating a relation of unsustainable dependency on Chinese debt. The Central Asian energy sector illustrates this dichotomy. On the one hand, Chinese financing helped avoid the collapse of the region’s obsolete energy systems. On the other hand, these investments exacerbated the indebtedness of the poorer countries in the region. Domestic economic reforms are urgently needed to reduce the risk of dependency on external debt. Despite limited judicial independence in the region, local courts should play an important role in supporting this process. By balancing the property rights of investors and the social state rights of consumers, courts can contribute to the public acceptability of unpopular but necessary reform measures.

The main reason explaining the obsolescence of the Central Asian energy sector is that energy tariffs are set far below cost recovery levels. With artificially low energy prices, utilities suffer financial losses and are not in a position to service debt. Imposing financial losses on regulated entities is at odds with the constitutional rights to property and freedom of economic activities, and the implementation of these rights in Central Asia’s laws on natural monopoly. To comply with these economic rights and restore the financial viability of utilities, tariff increases are urgently needed. However, these reforms are highly unpopular and, if not accompanied by subsidies for the poorer segment of the population, can breach the social state rights of housing and protection of the most vulnerable members of society. In 2010, the decision of the Kyrgyz government to increase electricity prices triggered civil unrest and resulted in revolution.

Domestic courts can contribute to the public acceptability of urgently needed tariff reforms. In particular, by ruling that artificially low prices violate utilities’ economic rights, courts become responsible for subsequent tariff increases. Governments are no longer to blame for these unpopular tariff decisions. For instance, some economic courts in Kazakhstan are already enforcing utilities’ right to cost-recovery in cases where the safe functioning of energy systems is at risk. Importantly, these judicial decisions concern claims brought by state-owned utilities against the state regulator, i.e. both the claimant and defendant are controlled by the government.

Courts can also contribute to the public acceptability of reform by enforcing consumers’ social state rights. Except in extreme circumstances (e.g. in the absence of subsidies for the most vulnerable consumers), courts are not well equipped to decide on the reasonableness of energy prices. However, courts have a role to play in enforcing the procedural rights governing tariff regulation, and in particular the requirement of public consultation. In 2014, the new tariff policy of Kyrgyzstan was annulled based on the failure of the government to properly consult the population.

By helping to balance and therefore entrench investors’ and consumers’ rights, courts can help legitimize infrastructure reforms that face strong public opposition, but are urgently needed to avoid the geopolitical risks associated with dependency on external donors. In jurisdictions where courts are friendly to the government, the judiciary can shift the blame of these unpopular but necessary reforms away from the government.

** Associate Professor Anatole Boute comes from The Chinese University of Hong Kong, Faculty of Law, and is author of Energy Security along the New Silk Road: Energy Law and Geopolitics in Central Asia (Cambridge University Press, 2019).