ARE THE ‘SAFEGUARDS’ IN THE TPPA ADEQUATE?
A LOOK AT THE EXCEPTIONS AND NON-CONFORMING MEASURES IN THE INVESTMENT CHAPTER
PRESS RELEASE BY THE
ACTION MOVEMENT TO OPPOSE THE TRANS-PACIFIC PARTNERSHIP AGREEMENT MALAYSIA
(BADAN BERTINDAK BANTAH TPPA)
Many criticisms and concerns have been expressed in relation to the investment provisions of the Trans-Pacific Partnership Agreement (TPPA) as well as the related issue of the investor-state dispute settlement (ISDS) regime, where corporations can directly sue governments.
These criticisms have focused on the fundamental flaws of the TPPA’s Investment Chapter:
- overly-broad and ambiguous scope of application;
- grossly lopsided status and protection granted to foreign investors, ‘capital’, and ‘investments’;
- imbalanced anti-development clauses such as ‘indirect expropriation’, ‘minimum standard of treatment’ and its related ‘fair and equitable treatment’, ‘most-favoured nation’, ‘national treatment’, the restrictions against ‘performance requirements’, ‘off-sets’, etc.
Proponents of the TPPA, on the other hand, claim that the agreement has sufficient ‘safeguards’ and ‘carveouts’ in the TPPA to balance narrow commercial foreign interests against the public interest, and to preserve the government’s prerogatives in acting in the interest of public health, the environment, affirmative action, or other areas in need of government intervention.
These concessions have been used by parties to ‘sell’ the agreement to certain stakeholders by assuring them their interests and welfare have not been overlooked, hence ‘carveouts’ for Bumiputera businesses and Petronas. These safeguards and exceptions had to be agreed to by all TPPA parties and had to specify the sectors and activities that countries wished to exclude from the obligations in the TPPA.
This statement focuses on the inadequacy of those ‘safeguards’. Does the TPPA truly balance foreign investor rights and privileges with adequate ‘safeguards’ for the public interest, as proponents of the TPPA claim?
TPPA proponents claim that the requirement to allow the free transfer of capital have been mitigated by two safeguards. But these controls are restricted to remedying (i) balance of payment and (ii) external financial difficulties crises or ‘exceptional’ macroeconomic problems. No other policy objectives, such as to prevent destabilising asset bubbles, are allowed.
Secondly, the safeguards are temporary and must be phased out progressively. Anything requiring a more permanent resolution (actions on capital inflows designed to avoid balance of payments and other macroeconomic problems) are prohibited, so we can only tackle balance of payments problems once they’ve occurred.
Thirdly, permitted controls must be terminated within 18 months. Extensions may be secured for additional periods of a year; but one half of the parties can overrule this request. It should be noted that Malaysia extricated itself from the 1997 financial crisis by maintaining such controls over 10 years.
Fourthly, it is the ISDS tribunal that decides when such safeguards over capital controls will apply, thereby taking the power away from central banks (The only concession being for situations relating to application of bankruptcy, securities, criminal, financial reporting, compliance with court orders; and for the application of laws relating to social security, public retirement or compulsory savings programme).
‘For environmental, health and other regulatory objectives’
According to the Investment Chapter, nothing prevents TPPA countries from enacting measures to ensure that investment activity in its territory is conducted in a manner sensitive to its environmental, health and other regulatory objectives.
But as the article itself states, these measures must be consistent with the investment chapter, which effectively negates the value of this provision.
Secondly, while the TPPA says that non-discriminatory regulatory actions (as required by the TPPA) that are designed and applied to protect legitimate public welfare objectives - such as public health, safety and the environment – do not constitute ‘indirect expropriation’, the investor can still challenge these “in rare circumstances”. The ISDS tribunal would then decide on a case-by-case basis.
Proponents of the TPPA like to point to the large number of performance requirements that a government cannot impose on investors in Malaysia. But while the restriction in the TPPA on imposing certain performance requirements does not prevent a party from adopting or maintaining measures, including environmental ones, that are necessary to secure compliance with a Party’s laws and regulations, this is negated by the provision that it must not be inconsistent with the TPPA Agreement.
Performance requirements are also allowed by the TPPA when these are measures necessary to protect human, animal or plant life or health. This provision is more restrictive for government than its counterpart in the World Trade Organisation’s General Agreement on Tariffs and Trade (GATT) 1947, while another comparable provision is narrower than its counterpart in GATT, Article XX(g), whichprovides for WTO members to take measures relating to the conservation of exhaustible natural resources. Given that 43 out of 44 attempts to employ Article XX in disputes before WTO dispute-settlement panels have failed, this does not bode well for the successful use of the more restrictive TPPA exceptions. Why are we praising provisions that are more restrictive than those we had already agreed to at the WT O, of which Malaysia has been a member for more than a decade?
Corporate Social Responsibility
What do the corporations have to return to a country after being granted extensive unlimited powers by the investment chapter?
Parties to the TPPA are told to merely encourage these investors to voluntarily incorporate into their internal company policies principles of corporate social responsibility (CSR). No sanctions are proposed for their failure to do so or to implement any policy it declares.
Nor does a country have similar reciprocal rights under the TPPA to sue the corporation for investments that have gone bad or that compromise the rights of people and the environment.
‘Most-Favoured Nation does not encompass ISDS’
Article 9.5.3 of the TPPA on Most-Favoured Nation (MFN) treatment does not encompass the ISDS procedures or mechanisms. This seems to imply that no action can be brought on the basis of a claimed violation of the MFN provision. Whether this is indeed the case awaits adjudication by an ISDS tribunal.
But it is certainly the case foreign investors can still proceed to challenge and sue a TPPA government for violating other standards of protection, such as the minimum standard of treatment (MST) and fair and equitable treatment (FET), citing in support (among other matters) the favoured treatment accorded to others.
Non-Conforming Measures (NCMs)
Each country’s new NCMs are set out in a schedule in Annex II. Generally, in the context of the investment chapter, the obligations which a party may be excused from fulfilling are specified. These relate to national treatment, most favoured nation treatment, performance requirements (or part), and the appointments of senior management and board of directors.
Significantly, the TPPA does not excuse TPPA governments from having to abide by some provisions that have been noted for restricting governments’ policy space, namely: minimum standard of treatment and fair and equitable treatment, expropriation and free capital flows.
Furthermore, the exemption is also circumscribed by its precise wording; anything else not explicitly listed (perhaps, because it was not contemplated or foreseen) is subject to the obligation of conforming to the TPPA. This is the effect of a ‘negative list’ approach of the TPPA – anything not specifically excluded remains part of the TPPA rubric. This has serious implications as any new sector or activity will automatically be included in the TPPA’s obligations. The fact that certain areas - like tobacco - need to be specifically excluded implies that the general safeguards will not prevent cases from being pursued in respect of other public interest areas not specifically excluded.
Those advocating for the TPPA never tire in pointing to an Annex II provision in the TPPA stipulating that the Malaysian government can adopt or maintain measures that provide assistance to Bumiputera for the purpose of supporting Bumiputera participation in the Malaysian market through the creation of new and additional licenses or permits for Bumiputera eligible to receive such assistance.
But they fail to include the following proviso “provided that such measures shall not affect the rights of existing license and permit holders or future applicants for licenses and permits in sectors where foreign participation is permitted”.
So firstly, the exemption is only for the creation of new and additional licences and permits.
Secondly, any future applicants for licences and permits relating to investments cannot be made subject to this requirement as foreign corporations are allowed to participate in virtually all sectors.
Thirdly, and most significantly, the exemption only relates to exemption from the TPPA obligations relating to national treatment and performance requirements. The government must still adhere to the minimum standards, expropriation and the fair and equitable treatment (FET) requirements. This can easily negate this Bumiputra NCM. The key point is that NCMs could be held not to apply to the FET and expropriation clauses.
Additionally, the exemption only relates to issuing of licences and permits and the government cannot require the appointment of a Bumiputra (or any other particular nationality) to a senior management position of a covered investment.
Appointment to the board of directors of a particular nationality or resident is permitted provided it does not ‘materially impair the ability of the investor to exercise control over its investment’. This seems to imply mere token appointments.
The Tobacco NCM
TPPA governments can prevent foreign investors from suing over tobacco control measures. Malaysia also reserves the right to adopt or maintain any measures relating to wholesale and distribution services for, among others, tobacco and cigarettes products.
It is, however, not a mandatory exception. TPPA governments can choose to do this for the tobacco control measures listed in Footnote 13 of the Article.
Furthermore, Article 29.5 still allows ISDS challenges against governments for laws and regulations over tobacco leaf (unless it is in a manufactured tobacco product or in the possession of a tobacco manufacturer) or tobacco farming.
In addition, TPPA governments can still be sued over their tobacco control measures by other TPPA governments (under state-to-state dispute settlement, SSDS).
As pointed out by the Southeast Asia Tobacco Control Alliance and others, the CSR provisions in the investment chapter when applied to the tobacco industry would violate all the seven principles of the ISO26000 Guidelines on CSR – as the World Health Organisation’s tobacco treaty, requires governments to ban CSR activities by the tobacco industry. This is especially so in the context of the massive increase in CSR activities in Malaysia by the industry to promote tobacco products, despite a ban on tobacco advertising, sponsorship and promotions. As the Alliance puts it, “The TPPA is an arsenal in the hands of the tobacco industry to oppose a ban on such activities.”
Improvements to the ISDS system?
Much ink and lip service have been spent touting purported ‘improvements’ to the ISDS system so as to make it more amenable.
While proponents declare that the TPPA provides for a panel ‘expediting review and dismissal of frivolous claims’ by foreign investors to ensure such claims do not reach ISDS tribunals, this appears to be merely a procedural improvement. The fundamental problems with the ISDS system itself are not addressed.
The claim that such a panel would also allow ‘for the possibility that investors pay attorney fees and costs for claims found to be frivolous’ applies only if an ISDS tribunal finds claims to be frivolous and decides to award the costs to the investor. On the other hand, an ISDS tribunal could still order the Malaysian government to pay the investor’s lawyers’ fees and costs.
Proponents of the TPPA also trumpet the provision that investors can only make a claim against a government under ISDS within 3.5 years from the time of the action on which the claim is made.However, the rest of the TPPA’s investment chapter allows broad legal liability by: a) protecting even investors who entered Malaysia before the TPPA goes into effect (as well as those who come afterwards);b) a broad definition of the types of investment which are protected;c) broad rights of investors in Section A of the Investment Chapter.
Secondly, under Malaysia’s Public Authorities Protection Act 1948, any action brought against the government for an act done as part of its statutory duty must be brought within three years. So how is this slightly extended period under the TPPA an ‘improvement’?
The provision ‘requiring Parties to resolve claims via consultation and negotiation before elevating to formal dispute’is unlikely to deter any investors from going ahead with a formal ISDS claim. Moreover, this is only a ‘should’ obligation. Since the TPPA still allows the ISDS tribunal to order the Malaysian government to pay compound interest, compounded monthly at commercial interest rates from the date the government took the action, this interest can be compounding during any consultation/negotiation period. Therefore consultation/negotiation may end up prolonging the period during which interest is compounded, if the Malaysian government loses the case.
The TPPA provision on the consolidation of claims arising from the same events or circumstances and mediation before filing a claimactually detracts from most court rules as it must be done with the agreement of all the disputing parties, unlike normal court processes, where the court has the final say.Proponents also fail to mention the additional requirement that the claim must first have a question of law or fact in common.
Transparency of ISDS
ISDS cases have almost always been conducted in complete secrecy. Now there appears to be a concession to transparency. The government sued must make the relevant documents available to the public. But if a party claims protection for certain information and the tribunal agrees, there will be no disclosure to the public. Further, at the hearing – which must be open to the public – this information will not be divulged.
There are hardly any serious, effective or convincing countervailing safeguards in the TPPA if foreign corporations want to sue a government over a purported national treatment or most favoured nation treatment violation; if its investments are interfered with; its expectation of profits affected; or it is required to perform in a particular way; or the repatriation of its profits hindered.
The trend looks set to continue that mainly developing countries will be sued successfully by these corporations for millions and billions of dollars by way of an investment regime that, in the words of a UN Experts group, provide “protection for investors but not for States or for the population. They allow investors to sue States but not vice-versa”. Not only is the situation aggravated, the Experts group says, by the “chilling effect” that intrusive ISDS awards have had, but States have been penalised for adopting regulations to protect the environment, food security, access to generic and essential medicines, reduction of smoking, or raising the minimum wage.
The TPPA appears to have mitigated some of these possibilities, but only marginally, leaving intact the concerns we have repeatedly expressed.
The Action Coalition to Oppose the Trans-Pacific Partnership Agreement (Badan Bertindak Bantah TPPA (BANTAH TPPA) is a coalition of 61 Malaysian individual and coalitions of non-governmental organisations.
 A fuller analysis of the Investment Chapter by Professor Gurdial Singh Nijar, Faculty of Law, University of Malaya, is available at http://www.ftamalaysia.org/file_dir/21276703056615126ceda2.pdf
 Article 9.11 of the TPPA.
 Article 9.8.
 Article 9.15
 These societal measures to safeguard the public interest will most certainly abridge the broad rights of a foreign investor under the TPPA. Yet their enactment could be threatened with a billion dollar ISDS suit by a foreign corporation. Can the government, for example, take action against a foreign company that is now shown – on new scientific evidence – to be polluting the environment and harming health? The case of a Swedish company suing the German government will make it precarious for the government to do so. The Swedish company launched a $4.6 billion action because Germany phased out its nuclear power plants following the Fukushima disaster. The same company succeeded in its cases against the German government for restricting the use and discharge of cooling water for a coal-fired power plant on the banks of River Elbe – which was seriously jeopardising the river and wildlife.
 Annex 9-B.3(b)
 Article 9.9.3(d)(i)
 Article 9.9.3(d)(ii)
 Article XX(b).
 Article 9.9.3(d)(iii) of the TPPA.
 Article 9.5.3 of the TPPA. MFN relates to the obligation of a state not to treat foreign investors from one trading nation-partner less favourably than the treatment it accords to investors from another nation with which the first state has a trade agreement.
 Article 9.11.2. The NCMs are placed in 2 separate annexes: (i) Annex I which allows the continuation of existing NCMs (local government measures do not have to be listed); and (ii) Annex II which allows new NCMs to be adopted in the sectors listed or existing ones to be modified in a way that would otherwise violate the obligations even more.See Appendix 1 of the full analysis, page 16.
 Article 4, Annex II (Schedule of Malaysia).See also Appendix 1 to the full analysis, item 4, p. 18.
 An ISDS case was taken against South Africa under a bilateral investment treaty (BIT) for its black empowerment policy measure. The government was sued under the expropriation and FET provision – when it ordered 26% of the shares to be sold to black South Africans at fair market value. The government finally settled the case by watering down its affirmative action policy. See Chapter 2: Investment treaty disputes: Big business for the arbitration industry, November 27th 2012, http://corporateeurope.org/2012/11/chapter-2-investment-treaty-disputes-big-business-arbitration-industry.
 Article 9.10.2.
 Article 29.5 of the Exceptions Chapter.
 See Appendix 1 at page 21 of the full analysis.
 E.g. see WTO’s tobacco disputes: https://www.wto.org/english/tratop_e/dispu_e/dispu_subjects_index_e.htm#selected_subject
 Mary Assunta, ‘TPPA vs tobacco control – the devil is in the details’. She also points out various other chapters that will dilute any measures that the government may seek to adopt under this NCM: http://www.malaysiakini.com/letters/319167; see also The TPPA and Tobacco Statement by the Malaysian Council for Tobacco Control, Nov 14, 2015.
 Framework Convention on Tobacco Control (FCTC), of which Malaysia and 179 other countries are parties to.
 Article 9.22.6 and 9.28.3
 Article 9.20.1
 Article 9.2 and 9.1
 Article 9.1
 Article 9.17
 As this is how some past ISDS tribunals have interpreted ‘any applicable interest’ in Article 9.28.1(a).
 UN experts voice concern over adverse impact of free trade and investment agreements on human rights