TPPA leak reveals sweeping restrictions agreed on SOEs

Wikileaks has just posted a ‘guidance’ document for TPPA ministers on SOE-related issues (https://wikileaks.org/tpp-soe-minister/). Although dated December 2013, Professor Jane Kelsey, a law professor from the University of Auckland who has monitored the SOE negotiations intensively, believes it reflects the content of the current text. Professor Kelsey has attended most of the TPPA rounds as a stakeholder or observer, most recently in March 2015, and wrote the analysis of the paper for Wikileaks,

The SOE chapter is new. No other agreement, including US FTAs, has such sweeping restrictions on the right of governments to support their SOEs. Until now there has been very little public information about what has been agreed and where the controversies lay.

This chapter seeks to lock in the purely commercial model for the indefinite future and tie the hands of future governments who believe state enterprises have a public good role.

State-owned enterprises will need to operate on a purely commercial profit-oriented basis, which appears to prevent them having hybrid public good and commercial roles.

SOEs cannot receive government support, such as subsidies or guarantees, if that adversely affects ‘another country’s interests’.

A government can’t provide guarantees for SOEs that are not also provided to foreign firms, or take less or no dividends from an SOE, because that would give it an unfair commercial advantage.

Creating a new SOE that would require initial injections of capital and support while it became established again seems to breach the rules.

SOEs would also be subject to the entire TPPA agreement, such as the intellectual property, government procurement and investment chapters, where they exercise authority delegated by the government. That could expose them to investor-state disputes where foreign competitors consider an SOE’s actions have breached the special rights of foreign firms under the investment chapter, including investor-state dispute settlement.

While the chapter talks about state-owned enterprises and competition, the effect will be to make SOEs prime targets for privatization on the familiar argument that if they are purely commercial there is no reason state should continue to own them.

The US clearly wants the rules to be fully enforceable by the state parties, backed by sanctions, in addition to their exposure to investor-state dispute settlement through the investment chapter. Other countries want more emphasis on dialogue and reviews. Ongoing monitoring and review would put SOEs and governments under constant scrutiny anyway.

The document shows at least some governments were nervous about the chapter. A number of the questions posed for ministers in the document in December 2013 have remained unresolved, at least until recently, and some will still be subject to agreement in Maui this week:

· How should an SOE be defined; in particular, should it include sovereign wealth funds and their subsidiaries?

· Would there be general exceptions to protect sensitive SOEs, such as banks or mining companies, or lists of excluded SOEs that have to be agreed with the other parties? If the latter, would they involve a negative list that precludes the establishment of future SOEs?

· Should developing countries that would be disproportionately affected by the rules have additional flexibilities, such as more exclusions or longer implementation periods?

· Should the rules apply to state, provincial and local government enterprises or should that be part of an ‘inbuilt agenda’ – code for delaying a decision on that issue, potentially forever?

· Most importantly, what protections will there be for public policy objectives and public good functions of SOEs, will those apply to all the rules, and how effective will they be?

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