Tuesday, October 01, 2013

TPPA - Do not let the foreign investor affect the improvement of livelihood, better health/environmental policies and better worker rights

Malaysia signs Free Trade Agreements/Treaties without first openly disclosing and consulting the people - and now, it is the Trans-Pacific Partnership Agreement (TPPA) that may be signed. Malaysians deserve to be consulted and kept in the know of all aspects of the TPPA agreement.

Najib's government may sign it but later when Malaysia is dragged to court by some foreign investor to an arbitration tribunal in New York and ends up paying millions ( maybe even billions) of ringgits - and maybe even cancelling policies, regulations and law made for public good, they may be not around. But most importantly, it will not be their money but the people's money and well-being that is affected.

One very dangerous section in the TPPA, as was also present in many other 'Free Trade Agreements' is 'investor-state dispute settlement' or ISDS which empowering the investor to sue the host state(like Malaysia) not here in Malaysia but in some arbitration tribunal in the US - but Malaysia cannot do the same against the investor or the country the investor comes from.

Canadian government banning a gasoline additive on environmental and public health grounds - and for that they were taken to task by the 'investor'(a US firm) and Canada HAD TO pay RM19 million in compensation, and remove the ban and declare publicly that the gasoline additive was not an environmental or a health risk

In the '... Ethyl Corporation v. Government of Canada, which saw the Canadian government banning a gasoline additive on environmental and public health grounds, but subsequently reversing that ban following the company's arbitration claim under NAFTA against Canada for expropriation. Before the matter was decided by the tribunal (after the tribunal decided that it had jurisdiction over the claim), Canada settled and agreed to remove the ban, declare publicly that the gasoline additive was not an environmental or a health risk, and pay $19 million in compensation to the US firm...' - THIRD WORLD RESURGENCE, Privileging investors over the public interest by Fauwaz Abdul Aziz(Third World Resurgence No. 275, July 2013, pp 18-22)
Do we want Malaysia to sign any agreement that will disable Malaysia from implementing policies/laws/regulations for the public good. public health, etc ... No, we do not.

In a 2013 report entitled 'Recent developments in investor-state dispute settlement (ISDS)', UNCTAD said it found that the total number of known treaty-based ISDS cases rose to 518 by the end of 2012. Since most arbitration forums do not maintain a public registry of claims, the total number of cases is likely to be higher. 
 
The year 2012 saw 62 new ISDS cases being initiated, the highest number of known treaty-based cases ever filed in one year under international investment agreements. Sixty-eight percent (42 out of 62) of the new cases involved governments of developing and transition economies as respondents. Sixty-three percent (39) of the new cases were brought on by developed-country investors. Seventy percent (17 cases) of the public decisions addressing the merits of the dispute saw investors' claims being accepted, at least in part, reflecting the highest percentage of rulings against the state. Last year also saw $1.77 billion being awarded to Occidental Petroleum in its case against Ecuador, the highest award in the history of ISDS, arising out of a unilateral termination by the state of an oil contract. 

It has also been widely reported that almost $380 million has already been paid out as compensation to firms in successful challenges of state measures, while 70% of decisions in favour of investors as claimants were in relation to actions over the environment and other natural resources. 

UNCTAD also pointed out that ISDS arbitrations had been initiated most frequently by claimants from the US (123 cases, or 24% of all known disputes), the Netherlands (50 cases), the UK (30) and Germany (27). The three investment instruments most frequently used as a basis for ISDS claims have been NAFTA (49 cases), the Energy Charter Treaty (29) and the Argentina-United States BIT (17).- THIRD WORLD RESURGENCE, Privileging investors over the public interest by Fauwaz Abdul Aziz(Third World Resurgence No. 275, July 2013, pp 18-22)

The who article is pasted below for your reading pleasure, but visit also Third World Network website for so much more resources. MPs, Senators and ADUNs (all people's reps now and in the future) need to educate themselves about the TPPA so that they can better protect the rights of Malaysians 

In my opinion, a trade agreement between countries should not vest additional rights on foreign investors... just equal treatment before the law in the host country. Any disputes would be dealt in the Malaysian court, just like all other local investors. 

Businesses and their investors should have no power to limit advancements in law/policy/practice of the State to improve the livelihood of workers and persons in the country - be it through higher minimum wages, greater obligations on employers with regard better retirement benefits/pension schemes/ etc, imposition on the mandatory usage of only regular employees (i.e. employment agreements until retirement) and no more short-term employment agreements or usage of workers supplied by third parties, better work/living conditions for workers,...

   





Privileging investors over the public interest
One of the most troubling aspects of the TPPA is its investment chapter which contains highly controversial provisions (dubbed 'investor-state dispute settlement' or ISDS) empowering an investor to sue the host state.  Fauwaz Abdul Aziz examines this extraordinary legal remedy.

THE investment chapter that has been proposed by the US for the Trans-Pacific Partnership Agreement (TPPA) is based primarily on the template of US free trade agreements (FTAs), particularly provisions in the North American Free Trade Agreement (NAFTA) and its Chapter 11 on investment. This immediately raises alarm bells, as NAFTA and NAFTA-style investment provisions have been widely criticised for their lopsided terms prioritising foreign investors and their investments over domestic investors as well as over health, environmental and other public interest concerns. 

A 2013 United Nations Conference on Trade and Development (UNCTAD) report in fact found that NAFTA has been the agreement most often invoked as a basis for investor-state dispute claims.1 What do NAFTA's Chapter 11 and other NAFTA-style investment agreements contain that seem to have emboldened and encouraged foreign investors to challenge governments and government regulations so frequently? What are the features of NAFTA and NAFTA-style investment protection and promotion contained in the TPPA, in particular, that are the source of concern?    

Definition of investment
The investment chapter that the US has proposed for the TPPA has an overreaching definition of 'investment' that governments are obliged to protect and promote; it goes far beyond 'real property'. As UNCTAD had noted in a 2005 report, a broad definition of investment may not be consistent with a government's development policy at every period in the life of a treaty. More specifically, the danger of such an overreaching definition is that it may commit a host country to permitting, promoting or protecting forms of investment that it did not contemplate at the time it entered into an agreement and would not have agreed to include within the scope of the agreement had the issue been raised explicitly.2 

Gus Van Harten points out the typically broad definition of investment contained in bilateral investment treaties such as the US-Ecuador BIT, which extends beyond tangible assets to include any intangibles and assets such as market share, goodwill and intellectual property rights.3 Similarly, 'investment' in the draft text of the TPPA's investment chapter is defined as:
'every asset that an investor owns or controls, directly or indirectly, that has the characteristics of an investment, including such characteristics as the commitment of capital or other resources, the expectation of gain or profit, or the assumption of risk. Forms that an investment may take include … an enterprise; shares, stock, and other forms of equity participation in an enterprise; …loans ...; futures, options and other derivatives; ...turnkey, construction, management, production, concession, revenue-sharing and other similar contracts; ... intellectual property rights...; licences, authorisations, permits and similar rights conferred pursuant to domestic law; and ...other tangible or intangible, movable or immovable property, and related property rights, such as leases, mortgages, liens and pledges...'

The wide-ranging breadth of the term 'investment' in investment treaties means that disciplines placed on governments will often overlap with disciplines arising from agreements on trade in goods, trade in services or intellectual property rights. Moreover, as a result of this wide coverage, the obligations on a government in a BIT will apply to virtually any governmental measure carried out at any branch or level of government and expose a wide range of domestic laws, regulations and policies to foreign investor challenge and claims for compensation, unless that measure has been expressly exempted from being challenged in the treaty.4 

As Harvey Purse and Sanya Reid Smith have noted in their paper 'Some impacts of a TPPA investment chapter', NAFTA cases show that both developed- and developing-country regulations, in areas including health, environmental protection and water conservation, could be challenged under its investment protection provisions. Equivalent investor protections in other treaties have seen governments sued over the latter's affirmative action policies, regulation of the oil sector, measures taken to reduce budget deficits during a severe financial crisis, the investor's permits being revoked because it violated the law, value-added taxes, the rezoning of land, measures on hazardous waste facilities, regulation of water companies, declaration of an area as a nature reserve to preserve the unique wildlife of the region, and treatment at the hands of media regulators.5 

The very real danger with the TPPA's investment chapter is that, since it replicates the extreme protections and promotion of foreign investors and their investments contained in NAFTA, the same outcome and barrage of investor-state dispute challenges will be replicated when the TPPA comes into effect. 

Investors and investor rights
           
As in NAFTA's Chapter 11, Article 12.2 of the proposed investment chapter of the TPPA defines 'investor' such that firms without significant investments in a TPPA country - and even investors from non-TPPA countries - may exploit the protections and privileges contained in the TPPA for foreign investors and the agreement's enforcement obligations. Article 12.2 of the draft text defines 'investor' as 'an investor of a TPPA Party, a national or an enterprise of a Party, that attempts to make, is making, or has made an investment in the territory of another Party.' 

As Lori Wallach and Todd Tucker have put it in 'Public interest analysis of leaked Trans-Pacific Partnership (TPP) investment text', such a definition fails to require that such an investor have 'actual business activities or make a significant commitment of capital in the host country'. This has seen in the past firms 'that have made no real investment in a country dragging governments through costly foreign tribunal proceedings' merely on the basis of 'having a staff person or two and a minor paper trail in the claimed home country' and thereby passing off as having 'substantial business activities' in that country6 when it may have merely been a holding company established formally in the host country but which is actually owned and controlled by investors of a third, non-party. 

Van Harten illustrates one form of 'forum-shopping' - made available by such a liberal approach to defining 'investor' - in the case of Aguas del Tunari SA v. Republic of Bolivia. The US firm Bechtel - after appraising that public opposition had arisen against its privatised water utility in the Bolivian city of Cochabamba - reorganised its corporate structure so as to incorporate three Dutch holding companies in between itself and the Cayman Islands firm that owned the Bolivian firm Aguas del Tunari, which was a party to the Cochabamba water concession. 

'Tracing this chain of ownership,' Van Harten states, 'the actual majority shareholder of Aguas del Tunari (and of the concession) was a US firm that had no access to a US-Bolivia BIT (because none was in force at the time). However, the broad definition of "investor" in the Netherlands-Bolivia BIT allowed Bechtel effectively to re-create itself as a Dutch investor, by way of Dutch holding companies, and to bring a claim against Bolivia under the Netherlands-Bolivia BIT.'7

Based on such provisions as those contained in NAFTA and the draft TPPA investment text, foreign investors can avail of such liberal approaches to 'forum-shopping' while governments such as those signing on to the TPPA 'must assume that any foreign investor in its economy may be able to access compulsory arbitration under an investment treaty even where the host state does not have a BIT with the state of origin of the foreign investor itself.' In this way, Van Harten concludes, such an approach in defining 'investor' strengthens the ability of foreign investors to redesign their corporate structure in order to maximise their opportunities to bring a claim against the government of the country in which their assets are located.8 

National treatment, performance requirements

Many quarters, such as UNCTAD, have noted the prudence of maintaining discretions to impose conditions on foreign investors to enter and operate in a host country, for a number of industrial development strategies: for protection, promotion and development of infant and export-oriented industries and small and medium enterprises, defence capabilities, creation, preservation and promotion of livelihoods, to regulate a monopoly in the public interest, technology transfer, cultural considerations, to preserve the environment, natural wealth and resources, and so on. Similarly, 'performance requirements' imposed on foreign investors have frequently been used by both developed and developing countries to ensure that benefits accrue to the national interest amidst moves to attract foreign investments.9

But Article 12.4 (on 'national treatment') of the draft TPPA investment chapter states that a TPPA party shall accord to investors of other parties 'treatment no less favourable than that it accords, in like circumstances, to its own investors with respect to the establishment, acquisition, expansion, management, conduct, operation, and sale or other disposition of investments in its territory.' Under this article, each party shall also 'accord to covered investments treatment no less favourable than that it accords, in like circumstances, to investments in its territory of its own investors with respect to the establishment, acquisition, expansion, management, conduct, operation, and sale or other disposition of investments.'10

The TPPA's 'national treatment' clauses, as proposed in the US draft text, would thus prohibit countries from restricting foreign investment within their territories, while Article 12.7 explicitly prohibits governments from imposing performance requirements on foreign investors from TPPA countries, such as requirements 'to export a given level or percentage of goods, to achieve a given level or percentage of domestic content. to purchase, use or accord a preference to goods produced in its territory, or to purchase goods from persons in its territory. to relate in any way the volume or value of imports to the volume or value of exports or to the amount of foreign exchange inflows associated with such investment.  [or] to restrict sales of goods in its territory that such investment produces by relating such sales in any way to the volume or value of its exports or foreign exchange earnings or to supply exclusively from the territory of the Party the goods that such investment [produces] to a specific regional market or to the world market.'

It is important to note that while governments are stopped from treating foreign investors less favourably than domestic ones, there is no clause to prohibit the reverse - as the discussion below will illustrate - of foreign investors being accorded unfairly better treatment than their domestic counterparts.

Minimum standard of treatment

Article 12.6 of the US' draft investment text stipulates that each party shall accord to investors from other TPPA parties 'treatment in accordance with customary international law, including fair and equitable treatment and full protection and security.' 'Fair and equitable treatment' includes the minimal obligatory treatment not to deny justice in criminal, civil, or administrative adjudicatory proceedings in accordance with the principle of due process embodied in the principal legal systems of the world, while 'full protection and security' requires each party to provide the level of protection required under customary international law.

Wallach and Tucker point out that as in NAFTA, the TPPA would provide for foreign investors the right to claim damages for even government measures that reduce their expected future profits (Article 12.12 on indirect expropriation) or differ from the expected regulatory environment that they might have had before the introduction of the new measure (Article 12.6 on minimum standard of treatment). This contrasts with other FTAs which - while not completely sufficient - at least had language to ensure that 'for greater certainty, whether an investor's investment-backed expectations are reasonable depends in part on the nature and extent of governmental regulation in the relevant sector. For example, an investor's expectations that regulations will not change are less likely to be reasonable in a heavily regulated sector than in a less heavily regulated sector'.11

Such language is absent in the draft investment text proposed by the US for the TPPA. The inclusion of NAFTA wording on minimum standard of treatment and the rights to compensation for indirect expropriation 'directly contradicts the assurances TPP governments have given to legislators and public interest advocates that the pact would safeguard regulatory sovereignty.' Inclusion of these terms in the TPPA would, in fact, provide ample opportunities for investors to challenge government measures - even those applying to both domestic and foreign firms - and get compensation for them.12

Overreaching definition of state measures

Implied in the discussion above is the understanding that, in contrast to previously held assumptions and definitions of property being in reference to real, physical property - which was thus protected from arbitrary government 'expropriation' - NAFTA-like clauses on 'indirect expropriation' have broadened property to include the foreign investor's expected value of his/her investment. Indirect expropriation has thus come to include the incidence of that expected value of the investment having been reduced by a government measure. The dominant practice of national legislative and judicial systems with regard to compensation for expropriation is to provide for such compensation only when the government has actually acquired an asset, not when the value of an asset has been adversely affected by a regulatory - or other government - measure.

In other words, 'fair and equitable treatment' has come to mean the onerous obligation of governments not only to ensure a transparent and predictable framework for foreign investors' business planning and investment but also to 'act in a consistent manner, free from ambiguity and totally transparently in its relations with the foreign investor'.13 Thus, a government measure that leaves a foreign investor's ownership title unaffected but that otherwise causes that investor 'economic harm (even incidental harm, potentially)' can be - and has been argued to be - regarded as compensable expropriation that requires payment of market value damages to the investor. In the case brought by Metalclad Corporation against Mexico under NAFTA, for example, it was concluded that expropriation included 'not only open, deliberate and acknowledged takings of property, such as outright seizure or formal or obligatory transfer of title in favour of the host State, but also covert or incidental interference with the use of property which has the effect of depriving the owner, in whole or in significant part, of the use or reasonably-to-be-expected economic benefit of property even if not necessarily to the obvious benefit of the host State.'14

Investor-state dispute settlement

The above discussion shows how NAFTA-based and NAFTA-like concepts and clauses in the TPPA contribute towards forming a lopsided 'playing field' for foreign investors to operate and dominate the economies of TPPA countries. These concepts and clauses achieve this by (i) being applicable to practically any government law, policy and regulation that affects the assets of foreign investors and (ii) setting out sufficiently ambiguous standards for tribunals to interpret challenges in favour of foreign investors. What now remains is to discuss the controversial investor-state dispute settlement (ISDS) mechanism that has provided for the international adjudication and interpretation of these clauses and concepts whenever a dispute arises between a foreign investor and a host state over a claimed violation of investment protection and promotion provisions.

International arbitration under the ISDS model propagated by NAFTA, the TPPA and other NAFTA-like investment protection provisions allows investors to directly challenge - and claim compensation for - government measures without the otherwise accepted 'exhaustion requirement' of seeking legal remedies within the host state. Internationally enforceable damages are awarded to foreign investors for, as discussed above, a whole range of legislative, policy or regulatory measures, by way of a system that is structurally biased against host governments.

The arbitral tribunal determines the available policy space of host governments in a context where only one class of parties (the investors) brings the claims - states cannot bring an ISDS dispute to the arbitration tribunal. In this way, arbitrators are incentivised to interpret and award in favour of investors so as to encourage more claims and more appointments, either as arbitrators or as counsel for foreign investors.15

Awards made by arbitration tribunals cannot be reviewed (other than for jurisdictional errors or serious procedural unfairness), whether in the same arbitration system or in any domestic court. In most cases, arbitration provides for the process as well as any decisions to be kept secret unless both of the disputing parties agree otherwise.16

Criticisms have also been levelled against the ISDS system due to the 'chilling effect' whereby investors' suits and a potential award may cause governments to abandon public measures. Many have cited the case of Ethyl Corporation v. Government of Canada, which saw the Canadian government banning a gasoline additive on environmental and public health grounds, but subsequently reversing that ban following the company's arbitration claim under NAFTA against Canada for expropriation. Before the matter was decided by the tribunal (after the tribunal decided that it had jurisdiction over the claim), Canada settled and agreed to remove the ban, declare publicly that the gasoline additive was not an environmental or a health risk, and pay $19 million in compensation to the US firm.

Conclusion

The above discussion has touched upon a number of cross-cutting issues and concerns that have been brought to light on account of the developments relating to ISDS. These include the issue of transparency and confidentiality of ISDS and the persistence of investor claims, or threats, against governments over measures introduced on environmental, health, financial crisis-related or other public interest grounds. Coupled with other issues that have not been discussed - such as the persistence of divergent and contradictory interpretations by arbitration tribunals of the same or similar investment provisions, as well as the alarming practice of involving specialised firms in financing international arbitration claims against states in exchange for a share in a possible future award or settlement in favour of the claimant - it would seem obvious that a complete relook needs to be taken by policymakers at the ISDS system currently gaining 'popularity' among governments.

Motivation for this relook can derive from recent discovery of the increasing scale and pace of attacks by multinational corporate interests on states in relation to public interest-related measures. In a 2013 report entitled 'Recent developments in investor-state dispute settlement (ISDS)', UNCTAD said it found that the total number of known treaty-based ISDS cases rose to 518 by the end of 2012. Since most arbitration forums do not maintain a public registry of claims, the total number of cases is likely to be higher.

The year 2012 saw 62 new ISDS cases being initiated, the highest number of known treaty-based cases ever filed in one year under international investment agreements. Sixty-eight percent (42 out of 62) of the new cases involved governments of developing and transition economies as respondents. Sixty-three percent (39) of the new cases were brought on by developed-country investors. Seventy percent (17 cases) of the public decisions addressing the merits of the dispute saw investors' claims being accepted, at least in part, reflecting the highest percentage of rulings against the state. Last year also saw $1.77 billion being awarded to Occidental Petroleum in its case against Ecuador, the highest award in the history of ISDS, arising out of a unilateral termination by the state of an oil contract.

It has also been widely reported that almost $380 million has already been paid out as compensation to firms in successful challenges of state measures, while 70% of decisions in favour of investors as claimants were in relation to actions over the environment and other natural resources.

UNCTAD also pointed out that ISDS arbitrations had been initiated most frequently by claimants from the US (123 cases, or 24% of all known disputes), the Netherlands (50 cases), the UK (30) and Germany (27). The three investment instruments most frequently used as a basis for ISDS claims have been NAFTA (49 cases), the Energy Charter Treaty (29) and the Argentina-United States BIT (17).

But we must also not lose sight of the parallel, or perhaps larger, context of issues in which the problems associated with ISDS are to be framed: the agreement by countries - developed and developing alike - to the surrender of their executive, legislative and adjudicatory prerogatives in the scramble for foreign investments, and to granting ever more - and inordinately higher standards of - protections, liberties17 and privileges to foreign investors than what is accorded to domestic firms. It is issues such as the scope and overreach of definitions of 'investor', 'investment' and state 'measures', and the interpretations of 'minimum standard of treatment', 'fair and equitable treatment', 'national treatment' and 'expropriation' that need to be reviewed, if not overhauled. A very opportune place for the 12 Asia-Pacific governments negotiating the TPPA to start such a relook is the proposed investment chapter of the TPPA itself as well as other NAFTA-styled investment agreements.                                                          

Fauwaz Abdul Aziz is a researcher with the Third World Network.

Endnotes
1.    United Nations Conference on Trade and Development (UNCTAD), 'Recent develop-  ments in investor-state dispute settlement (ISDS)', available at www.unctad.org/diae.
2.    Cited in Harvey Purse and Sanya Reid Smith, 'Some impacts of a TPPA investment chapter', 9.
3.    The US-Ecuador BIT defines investment as being: 'every kind of investment in the territory of one Party owned or controlled directly or indirectly by nationals or companies of the other Party, such as equity, debt, and service and investment contracts; and includes: (i) tangible and intangible property...; (ii) a company or shares of stock or other interests in a company...; (iii) a claim to money or a claim to performance having economic value, and associated with an investment; (iv) intellectual property...; and (v) any right conferred by law or contract, and any licences and permits pursuant to law.'
4.    Gus Van Harten, 'Policy impacts of investment agreements for Andean Community states', September 2008, 15.
5.    Harvey Purse and Sanya Reid Smith, 'Some impacts of a TPPA investment chapter', 1-2.
6.    Lori Wallach and Todd Tucker, 'Public interest analysis of leaked Trans-Pacific Partnership (TPP) investment text', 4.
7.    Citing the similar case of the 'Fedax arbitration', Van Harten has shown how the foreign arbitration tribunal appointed to preside over a suit against the Venezuelan government allowed a Dutch company to bring its BIT claim against Venezuela concerning promissory notes issued by the Venezuelan government. Prior to the claim, the promissory notes had been transferred to the Dutch company by a Venezuelan firm. Venezuela's argument that the investor had not made an actual investment in the country's economy was rejected. See Van Harten, op. cit., 16-17.
8.    Ibid., 17.
9.    Purse and Smith, op. cit., 3; Van Harten, op. cit., 25.
10. Even domestic policies that are not applied discriminately but apply equally to both local and foreign firms can be seen as violating investors' rights in the TPPA if a foreign investor can claim that, due to its business model, it ends up experiencing a slightly higher burden in complying with the law, regulation or policy introduced by the host government. See Wallach and Tucker, op. cit., 7.
11. Wallach and Tucker, op. cit., 5-6.
12. Ibid.
13. Van Harten, op. cit., 8.
14. Ibid., 24-25.
15.  One study looked at 140 international arbitral cases up to May 2010 and found indications of systemic bias in the resolution of issues in investment treaty arbitration. The tested expectations were that arbitrators tended to favour interpretations that benefit the claimant-investor by expanding the authority of tribunals and by allowing more claims to proceed, especially in cases where the claimant is from a Western capital-exporting state such as the US, France, the UK or Germany. See Gus Van Harten, 'Pro-investor or pro-state bias in investment-treaty arbitration? Forthcoming study gives cause for concern', Investment Treaty News, Issue 3, Volume 2, April 2012; and Nicolas Hachez and Jan Wouters, 'International investment dispute settlement in the 21st century: Does the preservation of the public interest require an alternative to the arbitral model?', Leuven Centre for Global Governance Studies, Working Paper No. 81, February 2012, 11.
16. Hachez and Wouters, op. cit.; Wallach and Tucker, op. cit., 5.
17. See letter, available on the Internet, entitled 'Promoting financial stability in the Trans-Pacific Partnership Agreement', dated 28 February 2012.
*Third World Resurgence No. 275, July 2013, pp 18-22
 

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