There are three main points of reference for any agreement with Hong Kong, layered on the situation as described above.
T
he first is the WTO. The most important aspects of this are tariffs and the GATS. In the case of Singapore, both governments took the stance that their regimes were so open with respect to tariffs and investment that services were one of the few areas in which any visible movement could be claimed. That ignored the effects that changes in tariff and investment rules might make in trade and investment behaviour, and the further obstacles it put in the way of reinstating some controls on foreign investment and capital movements. It is likely that New Zealand negotiators will take the same approach in the case of Hong Kong (despite the potentially devastating effect on our textile, footwear and clothing industries), and so further opening of services is likely to be a major focus, and will build on the GATS commitments. A secondary but important issue is the Agreement on Government Procurement, which Hong Kong is a signatory to, but New Zealand reportedly did not sign because it was insufficiently deregulatory. New Zealand does have commitments on procurement under CER (goods only) and the SNZCEP (both goods and services).
The second point of reference is the existing IPPA, because it will need either to be incorporated into any agreement, or be read alongside one, hugely intensifying its investment, deregulatory and economic development implications.
The third is the SNZCEP on which it is probable that a Hong Kong FTIA will be modeled. It goes further than the GATS and the IPPA in a number of respects.
As described above, Hong Kong's GATS commitments are not as wide-ranging as New Zealand's. New Zealand negotiators will be trying to expand Hong Kong's GATS commitments in a way that is consistent with GATS, but pushes further towards complete liberalization of services.
Education, and professions including architecture and engineering were New Zealand targets in Singapore and are likely to be in Hong Kong. Hong Kong can be expected to demand concessions in return. New Zealand has relatively little to give in services: it already has one of the most wide-ranging commitments of any WTO member.
If Hong Kong asks for like-for-like concessions, then New Zealand's public education and health systems, both of which have become commercialized and open to private sector competition, are at risk of being locked opened to commercial competition from companies based in Hong Kong. That would undermine the government's proclaimed intention to restore the public dimension to these systems. Similarly, the professions risk being locked into international competition, potentially undermining any special contributions they make to New Zealand society culturally, socially, in terms of quality or in raising skill levels.
Education - particularly tertiary education - has been a strongly disputed aspect of GATS, in New Zealand and internationally because of its importance in the social and cultural - as well as economic - development of the nation. For many people - but not previous New Zealand governments - there is a strong aversion to it being treated as a commodity, which is what its inclusion in GATS (or similar provisions in a FTIA) mandates.
New Zealand's tertiary funding system provides grants to private education providers on the same basis as the public institutions. Even if that changes, it seems likely that there will still be substantial subsidies to private tertiary education providers. That makes a tempting target for overseas education companies which under GATS are entitled to the same or better treatment than locally owned private ones. There is a high risk of increased privatization and overseas capture of New Zealand's tertiary education system by stealth.
There are already numerous examples of this, including Nord Anglia Education PLC of the U.K., the first education company to be floated on the London Stock exchange, which took over the Christchurch Design and Art College with a staff of 46, and 200 students in 1997; the Japanese-owned International Pacific College at Palmerston North; Singapore-owned computer dealer Computerland by associating with the private NZQA-approved Canterbury Institute is offering courses which attract government subsidies; the proposal by the University of Limerick (Ireland) and Victoria University of Wellington to set up a “university college” in Taupo; and the central role of Canadian media giant, Thomson Learning, in the plans of the international Universitas 21 consortium of universities, of which University of Auckland is a member, to run an international on-line University.
Amendments to the New Zealand Qualifications Authority's powers currently before Parliament would authorize it to approve both courses from overseas providers (including those supplied across the border via Internet) and the overseas providers themselves. Approval would entitle foreign providers to receive access to tuition subsidies equal to that received by private providers: indeed, GATS commitments would prevent discrimination against them. So public tertiary tuition subsidies could flow straight out of the country.
New Zealand has been an enthusiastic, but not terribly successful, education “exporter” – for a long time through overseas students coming to New Zealand universities. The New Zealand government is seeking to expand those “exports”, in schools as well as tertiary institutions.
More recently New Zealand tertiary institutions have begun to “export” education by providing courses through a physical presence in Malaysia, Singapore and elsewhere. This is undoubtedly one of the gains the New Zealand government will be hoping to make in the Hong Kong FTIA. However it is difficult to see New Zealand benefiting from it. Hong Kong has a well developed tertiary education system, with considerably better student: teacher ratios than New Zealand, particularly in tertiary education (see Table 6). There is still a shortage of facilities, leading to many tertiary students going to the U.K. and elsewhere overseas (including 400 full fee-paying students enrolled in New Zealand tertiary education at 31 July 2000 according to the Ministry of Education, and approximately another 400 in schools). That shortage may make it a tempting market, but it will favour providers with plentiful capital resources and high reputations because of the high costs (particularly of office space), high incomes of students' families, and high standards of existing facilities. It will therefore be considerably harder to establish a place in than elsewhere in Southeast Asia and will likely require commitment of financial resources at a time when shortage of funding is causing real concerns about the quality of New Zealand education at all levels.
The government may instead seek to attract more students from Hong Kong (and China) to study in New Zealand. It is unclear how any agreement would help promote that, and to the extent that inter-government cooperation would help, could easily be done outside the context of a full FTIA. Students are already coming to New Zealand, and there do not appear to be any regulatory barriers to them. Any advantage that New Zealand has over other educational destinations comes from cost and lifestyle. It would be foolhardy to compete simply on the basis of cost: it would have to be achieved primarily through lower incomes to those working in education, or by reducing quality through worsening student: teacher ratios. Preserving the attractive lifestyle and the FTIA appear fundamentally contradictory. It is commonly accepted, even by proponents of trade and investment liberalization, that such policies further heighten inequalities and thus tensions in society. Lifestyle will inevitably suffer.
Of further concern is what concessions will be required in return. In the Singapore agreement, the New Zealand government proposed to introduce new uncertainties with new wording on education and only under pressure maintained the education status quo that it had committed to under GATS. That is already one of the most liberalized of all WTO members. Only thirty countries made commitments to open their education to international competition under GATS, and only 21 of those opened it in higher education, 23 in secondary and 21 in primary, according to the WTO secretariat (“Education Services, Background Note by the Secretariat”, 23/9/98, document S/C/W/49, Council for Trade in Services).
Table 6
The Hong Kong Education System, 1999
(Source: HKCSD)
Level/Type Institutions Students Student: Teacher ratios
Kindergarten 756 171,138 12.6
Primary School (2) 819 491,851 22.4
Secondary School (2) 519 465,250 18.9
Adult Education Institutions (3) 859 142,152 -
Special Education School (4) 74 9,687 5.6
Subtotal 3,027 1,280,078
Hong Kong Institute of Vocational Education(6) 1 54,781 19.5
UGC-funded Institution 8 12.5
sub-degree 20,916
First-degree 47,467
Postgraduate 15,371
The Open University of Hong Kong (7) 1 25,654 Not available
The Hong Kong Academy for Performing Arts 1 704 8.9
Approved Post-secondary College 1 2,361 21.1
Subtotal: Total formal tertiary 12 167,254
Total 3,039 1,447,332
Notes (as provided by HKCSD):
(1) Figures include schools operating under the English Schools Foundation (ESF) Schools and International
Schools.
(2) Figures include evening schools.
(3) Adult education institution refers to government evening institutes and various private schools offering a
variety of subjects including commercial classes.
(4) Include Special Schools, Practical Schools and Skills Opportunity Schools.
(5) The Technical Colleges and the Technical Institutes were renamed the Hong Kong Institute of Vocational
Education in 1999.
(6) The Hong Kong Institute of Vocational Education was formed in 1999. It is composed of nine campuses of
which two are the formerly Technical Colleges and seven are the formerly Technical Institutes.
(7) The Open Learning Institute of Hong Kong was established in June 1989. It was retitled The Open
University of Hong Kong on 30 May 1997.
These existing commitments have already posed constraints on policy options for the tertiary sector, such as not allowing New Zealand to limit the total number universities in the country. The government would be well advised to try to withdraw from these commitments. Instead, the SNZCEP cements in that highly undesirable position for Singapore; a repeat for Hong Kong would make withdrawal even more ineffectual and difficult.
Similar problems have emerged in the audio-visual sector, with the proposed introduction of local content broadcasting quotas falling foul of existing GATS and CER commitments. The government, under the Prime Minister's instruction, did not repeat those commitments in the SNZCEP, although it was unable to create a watertight right to reintroduce such quotas. Clearly the government is aware of the problems, and has been willing to move in areas where its specific policies are threatened. Yet this treats only individual symptoms of the broadly deregulatory policies that GATS represents. Further threats to policies New Zealand wishes to follow will inevitably arise across a broad range of services. The entire GATS commitment (and similar commitments under SNZCEP and CER) need review rather than being reinforced in a new FTIA.
As well as like-for-like concessions in services, Hong Kong will almost certainly ask for concessions in other areas such as the remaining TCF tariffs (frozen in fulfilment of an election promise by the present government), in government procurement, particularly in relation to local government (see below), or investment.
Yet, given the overwhelming focus of Hong Kong investment on commercial property, construction, importing, wholesaling and retailing, it is difficult to justify any claim that it can provide investment in services that are of any advantage to New Zealand. The Hong Kong interest in business services and construction and related services also has obvious impacts on government procurement, in which construction is significant (see next section).
The New Zealand government argued in the Singapore context that openings for our engineering and related consultancies, including recognition of engineering qualifications, was an important gain, yet this has never been quantified. Such firms have been active in many ASEAN countries without any need for further agreements. Mutual recognition of qualifications is a reciprocal benefit that could be negotiated outside the context of a full FTIA. To make inroads into Hong Kong's relatively sparse GATS commitments in construction and engineering would have to be at the cost of substantial concessions on New Zealand's part.
Government procurement was a feature of the Singapore agreement that went well beyond existing WTO and CER commitments. That Hong Kong has already made concessions in this area suggests that New Zealand will try to persuade it to make further concessions, which will again require concessions on New Zealand's part. This area is particularly contentious because it directly affects local government.
In the SNZCEP, all government procurement of goods and services over the equivalent of $125,0001 were opened to Singapore on an equal basis to local companies. The competitive position of local goods suppliers was weakened by the Rules of Origin in that agreement which meant that goods had to be treated as coming from Singapore or New Zealand even if only 40% of the content was created in either of the countries. That is likely to be of even greater concern in the case of Hong Kong. It also only applied to procurement that was subject to tenders or open advertising, which is the routine practice in New Zealand but not in many other countries.
Local service suppliers may find themselves competing with companies from around the world using a Hong Kong base for tendering. While the SNZCEP does not bind local government directly, it requires central government to use its “best endeavours” to secure compliance from local government. Failure to do so can lead to a dispute under the agreement. The requirement for local authorities to comply is therefore indirectly enforceable and local government will come under enormous pressure to comply.
An example of a service generally the responsibility of local government covered in the SNZCEP is environmental services – rubbish collection, sewerage, and perhaps services in relation to water supply, all of which are an important and often contentious part of local services. Some (such as waste recycling) are often provided by non-profit or even voluntary organizations but would be required under this regime to be advertised to international competition, unless they are run by the local government's own departments or are less than $125,000 in value.
There are important restrictions in the SNZCEP on achieving social ends in procurement (SNZCEP Article 53): central or local governments cannot “impose seek or consider” making conditions on suppliers that would “encourage local development or improve the balance of payments accounts by requiring domestic content, licensing of technology, investment, counter-trade or similar requirements.”
Similarly, governments must “use value for money as the primary determinant in all procurement decisions” (SNZCEP Article 49), where “‘value for money' means the best available outcome for money spent in terms of the procuring agency's needs. The test of value for money requires relevant comparison of the whole of life costs and benefits relating directly to the procurement. ‘Whole of life costs and benefits' include fitness for purpose and other considerations of quality, performance, price, delivery, accessories and consumables, service support and disposal.” (SNZCEP Article 48(g))
The effect of these provisions is likely to be that central government and, more often, local government, will not be able to use its spending power to simultaneously achieve social aims. Those aims typically include supporting non-profit groups, creating employment, and regional economic development. Commercialization will be encouraged, as described in relation to services.
On the other hand, government-owned corporations perform many public functions in Hong Kong, but such “bodies corporate” with the power to contract in their own right are not covered by these procurement provisions (see SNZCEP Article 48(e)).
The Investment Promotion and Protection Agreement
The New Zealand-Hong Kong IPPA (New Zealand Treaty Series 1995, No. 14) was signed in 1995, and is very similar to one signed with China in 1988 (New Zealand Treaty Series 1988, No. 10, which came into force in 1989). Both have minimum 15 year terms, with protection to continue for a further 15 years for any investment in place if the agreement is subsequently terminated. Hong Kong has signed very similar agreements with at least 13 other nations10 .
In addition to the rigidity of this lengthy term, two features stand out (as in similar agreements signed by the previous government with Chile and Argentina which await only ratification).
These are the expropriation provisions (which are not contained in the SNZCEP), and the disputes procedure.
These provisions are very similar to what was proposed in the OECD-sponsored Multilateral Agreement on Investment (MAI), which was defeated in 1998 after widespread international opposition. The MAI's expropriation and disputes procedures were at the centre of that concern. Those provisions were in turn modeled on ones in NAFTA11 . Events since the defeat of the MAI have well justified the concern, though dismissed at the time by the MAI's proponents.
The heart of the problem lies in the definition of expropriation. In the Hong Kong-New Zealand IPPA it is defined (IPPA Article 6) as follows:
Investors of either Contracting Party shall not be deprived of their investments nor subjected to measures having effect equivalent to such deprivation in the area of the other Contracting Party except lawfully, for a public purpose related to the internal needs of that Party, on a non-discriminatory basis, and against compensation. [My emphasis.]
The “equivalent effect” provision has profound implications. In NAFTA it has been interpreted to include loss of an investment's value through loss of profitability. It means that any change in environmental regulations by central or local government which reduced the profitability of an enterprise (and hence the value of a permit or asset) could result in awards of compensation and perhaps reversal of a change in law or regulation. It could be subject to lengthy litigation as to whether it was “lawful”, “for a public purpose related to the internal needs” of New Zealand, and “non-discriminatory”.
The implications are widened even further by the definition of investment which, as well as all property rights (such as mortgages), shares (whether as short term portfolio investment or long term direct investment), and intellectual property, includes “business concessions conferred by law or under contract, including concessions to search for, cultivate, extract or exploit natural resources”. That includes mining permits, resource consents under the Resource Management Act and other concessions and exemptions. If the value of such permits (or the underlying assets for which they are used) is reduced by for example a general tightening of environmental, health, safety or working conditions, then corporations affected could make a claim for compensation or reversal of the government actions if they are owned, or have a legal presence, in Hong Kong. Though local governments are not bound by the IPPA, central government can be forced to compensate for their actions, almost certainly leading to law changes or pressure on local governments to restrain their actions.
Even the threat of such actions, with its heavy cost in legal fees and time, is a brake on government actions that would otherwise have been taken in the interests of its citizens.
These points have been demonstrated by decisions under NAFTA, in what one U.S. attorney, Lydia Lazar, describes as “a strategic windfall for companies unhappy with actions taken by local or federal governments, actions that impede or thwart their corporate ambitions”12 . More challenges are in the pipeline. Claims by corporations regularly amount to hundreds of millions of U.S. dollars, and settlements in the tens of millions. Some examples:
The Ethyl Corporation sued the Canadian government for restricting use of a petrol additive produced by the corporation, MMT. Canada had restricted it on the grounds that it caused nervous-system damage and interfered with car emission control systems. Ethyl sought about US$250-million, claiming not only lost Canadian profits but damages to its worldwide interests, saying the Canadian action sullied its reputation. Ottawa agreed to repeal the cross-border ban, pay US$13-million in damages to Ethyl and provide an admission that there is no scientific evidence to back automakers' claims that MMT interferes with emission-control equipment or poses a health threat. In return, Ethyl dropped all trade and court cases.
A case is currently in progress where Vancouver-based Methanex Corporation is suing the Californian State government claiming its ban on methyl tertiary butyl ether (MTBE), made by the company in New Zealand and Chile, amounts to expropriation. MTBE was introduced to reduce air pollution but in 1999, California ordered the removal of MTBE from gasoline supplies by 2003 as a way to protect water supplies after a University of California study found that MTBE had affected at least 10,000 groundwater sites throughout California. Other studies have shown that MTBE may cause cancer as well as neurological, dermatological, and other problems in humans. Other U.S. states have banned or proposed banning MTBE, and the United States Senate Environment and Public Works Committee voted recently to ban MTBE across the United States. Methanex is claiming US$970 million in damages, described as expropriation of their expected business profits.
In a Mexican case, Lazar describes the situation as follows. Metalclad Corporation, a US waste disposal company, accused the Mexican government of violating Chapter 11 of NAFTA when the state of San Luis Potosi refused it permission to re-open a waste disposal facility. In 1993, Metalclad purchased a landfill in San Luis Potosi with the permission of the Mexican government. The company removed 20,000 tons of waste illegally dumped there. However following elections in 1994, popular opposition grew after it was revealed that subterranean streams supplying water to the local community ran under the landfill. The State Governor ordered the site closed down and declared it part of a 600,000 acre ecological zone. Metalclad successfully claimed that its property had been illegally taken by the Mexican government, which should pay compensation under NAFTA. Metalclad presented a valuation of the landfill business at $90 million. It was awarded US$16.7 million. Metalclad spent nearly $4,000,000 in legal expenses, and Mexico's expenditure was believed to be significantly higher. The Mexican government is challenging the decision in a Canadian provincial court – an option that would not be available in the case of a Hong Kong-based company winning such an action against New Zealand under the IPPA.
In the words of Mexico's general counsel for trade negotiations and lead counsel in the Metalclad case, Hugo Perezcano, the municipality followed various constitutional and legislative provisions in its refusal to grant Metalclad a permit. “Metalclad knew the local community opposed it and they decided to force the situation, ignored the issue of the local permit and built without having a permit. It should have been no surprise that they had overstepped that jurisdiction.” (Source: “NAFTA: Sovereignty versus Chapter 11”, Vancouver Sun, 15/2/01, by Sarah Schmidt.)
The latter two cases are particularly significant in that they involved sub-national governments – a U.S. state and Mexican local government – which were not signatories to NAFTA. There are clear warnings here for New Zealand local government. Their actions are subject to challenge and compensation, but they will have no standing in the closed tribunals that decide the outcome. A central government unsympathetic or hostile to, for example, regional development or environmental policies followed by a local authority, could decide not to defend, or defend half-heartedly, a case which would then give it leverage to amend legislation, funding or conditions on funding.
New Zealand examples of recent years that could lead to such litigation include
- Auckland City Council's halting of the Britomart scheme. The loss of the consent for the scheme is both the loss of “business concessions conferred by law or under contract”, and led to the loss of future profits and the value of the company promoting the scheme (indeed, it could be claimed, its eventual failure). There is therefore a strong argument that it is expropriation in the language of the IPPA, in that it has an “effect equivalent to such deprivation” of the assets.
- The renationalisation of ACC arguably led to the loss of “business concessions conferred by law or under contract”, and certainly to loss of expected profits and the value of insurance company assets, again leading to arguments that this is expropriation.
- The slowing of the fast ferries in the Marlborough Sounds by the Marlborough District Council, because of the damage they were causing to surrounding shores and sea life, and concerns about the safety of small vessels using the Sounds. The ferry owners – Tranz Rail and Top Cat – claimed the action reduced their profitability (and hence the value of their assets). Top Cat went out of business shortly afterwards, claiming the District Council's actions as a factor.
- The Electricity Industry Reform Act 1998 banned any company from owning an electricity supply network (lines) operation as well as either an electricity retailing or generation operation. It forced many companies to sell parts of their operations – in most cases unwillingly. In the event, most made extraordinary capital gains (at the expense of consumers) from the sales and purchases that ensued. Had any made a loss, they would have had a strong argument that this amounted to expropriation through loss of their assets or their value.
Each case could lead to large compensation claims if the NAFTA examples are a guide, but they would also lead to challenges as to whether the actions by authorities were taken “lawfully, for a public purpose related to the internal needs of that Party”. Both those ingredients were disputed at various times in all these examples. If a tribunal upheld such challenges, it could require reversal of the actions as well as compensation (as in the Ethyl Corporation vs Canada case above).
In most of these cases, rights have been created by the IPPA beyond those existing under New Zealand domestic law. These rights are not available to most New Zealand citizens or companies.
While none of the above involved Hong Kong investors, it would be a very simple matter for the owners to move the legal ownership of the assets to a Hong Kong subsidiary in order to gain these rights. The IPPA's definition of investor includes “corporations, partnerships and associations or other legally recognized entities incorporated or constituted or otherwise duly organized under the law in force” in Hong Kong. Foreign companies can be (and are) registered in Hong Kong quickly, easily and without restriction, immediately gaining protection for their New Zealand investments. This tactic is not only consistent with Hong Kong's role as a haven for companies wishing to select the most advantageous legislative environment, but has a recent precedent in Bolivia, involving the Bechtel Corporation. Canadian journalist, Murray Dobbin reported (“Water: right or commodity?”, National Post, 8/2/01):
In February, 1999, the World Bank told the mayor of Cochabamba [in Bolivia] that if the city did not privatize its water system it would not receive another cent of financial assistance for local water development. Then, after judging the resulting Misicuni privatization project financially unviable, the Bank proceeded to back it anyway, insisting on water pricing that would cover the excessive costs, and guarantee that Bechtel would earn a 16% profit.
Water prices for many locals tripled, meaning some people were paying 20% of their income for water…
The resulting citizens' revolt shook the Bolivian government. It led to a week of protests, general strikes, and highway blockages which brought major areas of the country to a virtual standstill. The government caved and told Bechtel to leave. The privatization was reversed and the water system handed over to the town.
But Bechtel had not given up. Apparently anticipating trouble, Bechtel made moves before its expulsion that guaranteed it access to one of the world's 1,500 powerful Bilateral Investment Treaties (BIT). These treaties – mini-MAIs with all of the intrusive power of the failed Multilateral Agreement on Investment – allow corporations to sue governments directly. And Bechtel, knowing that Bolivia had such an agreement with Holland, transferred its holding company from the Caymen Islands to Holland. It is now using the BIT to sue Bolivia for US $40 million.
In addition, a Hong Kong national, or anyone with “right of abode in Hong Kong”, who is resident in New Zealand, has the same rights under the IPPA. This creates an extraordinary “super-investor” class within New Zealand which has much greater rights than the ordinary New Zealand citizen or company.
The man behind the Britomart fiasco, Jihong Lu, provides an example under the IPPA with China. Lu is a national of China. Even after his New Zealand-registered companies associated with the project have exhausted legal processes within New Zealand to extract compensation for its cancellation, he could, as an individual, take action under the New Zealand-China IPPA for compensation for loss of his assets, namely the value of his shares in the companies. He has a strong incentive to pursue such a course because he is now bankrupt as a result of other business deals.
If the expropriation provisions of the IPPA are a threat to New Zealand's ability to follow its preferred social, economic and environmental policies, the disputes procedure under which such actions are taken, is of equal concern. Article 9 of the IPPA provides for investor enforcement: it gives investors the right to force such disputes to arbitration under the Arbitration Rules of the United Nation's Commission on International Trade Law (UNCITRAL). Effectively this gives corporations equal standing with governments and a potentially greater right to enforce outcomes of disputes arising under the agreement than the governments themselves - an unprecedented development in the history of nations' sovereignty.
As Lazar states in reference to NAFTA and the U.S.A.:
The fact that NAFTA mandated the use of arbitration to resolve such sovereign/investor disputes has had a profound impact on the balance of power between private economic interests and sovereign states, one that deserves to be more fully debated. That impact can be seen when considering the recent arbitral award against Mexico, which will soon take on the force of a legal judgment. When it does, a sea change in the balance of power between corporations and sovereign states will have occurred.
To understand why, consider how our judicial system handles arbitral awards. It is comparatively difficult to convince a U.S. court to overturn an arbitral award, and U.S. courts have traditionally accorded deference to foreign arbitral awards. Now, however, when just the threat of a Chapter 11 action may suffice to wrest a financial settlement from a government, investors have unprecedented leverage against states. As international arbitration becomes the de facto global legal regime between economic entities and sovereign states, widespread notions about “global governance without global government” need to be critically re-evaluated.
Lazar argues that such agreements undermine “sovereign immunity”. Her references to NAFTA can be just as well applied to the IPPA and similar investment agreements.
This judicial doctrine holds that a state cannot be sued without its consent. Over the course of the last century, sovereign states have become less immune to legal process by their creditors through the emergence and acceptance of the so called “restrictive” theory of sovereign immunity, which states “accept” by signing international conventions, implementing statutes, or through case law decisions. This theory is based on the idea that a sovereign can either explicitly waive its immunity to being sued without its consent (for example, in a contract or a treaty) or implicitly waive its immunity when engaging in commercial activity.
NAFTA added a new wrinkle to the restrictive theory of sovereign immunity because it altered the longstanding presumption that, apart from the two exceptions noted above, only states and state based international organizations had legal standing to pursue noncontractual claims against one another under international law. Under NAFTA, a corporation (referred to throughout NAFTA as an ‘investor') is now empowered to force the signatory countries into arbitration13 when it believes it has been economically harmed by any governmental activity, whether or not commercial.
The slogan of UNCITRAL, under which IPPA investor-government disputes are arbitrated, is “ONE WORLD OF COMMERCE: towards ONE COMMERCIAL LAW”. Its Arbitration Rules (AR)14 are typical for such proceedings. UNCITRAL itself takes no part in the proceedings: it has solely created a set of model rules that will be used by the parties to disputes under the IPPA. The process can be seen as a privatization of the commercial justice system.
The arbitral tribunal is appointed by the parties to the dispute. No third parties, such as a local authority, affected neighbours, employees or other citizen groups, have any standing in hearings, if hearings do occur (all submissions may instead be writing). Indeed “hearings shall be held in camera unless the parties agree otherwise” (AR Article 25(4)), and third parties will not normally even be aware that the dispute is being heard unless called by one of the parties as witnesses or appointed by the tribunal as an expert. There is no right for the public to listen to proceedings or view evidence or submissions presented. The final “award may be made public only with the consent of both parties” (AR Article 32(5)) so the corporation party to the dispute can veto any decision being made public. So can a government which is embarrassed or nervous of public or investor reactions. Arbitral decisions are not bound by – nor do they create – legal precedents, although they do “help create international custom and usage”, according to Lazar. She describes the nature of the tribunals as follows:
Substantively, arbitral decisions reflect the economic interests of businesses. Arbitrators do not explicitly incorporate any other interests, such as environmental, social, or political concerns. Yet through its incorporation into the NAFTA regime, arbitration will continue to become, substantively, one of the leading legal mechanisms governing international commercial disputes. Should this occur, those whose interests are not represented are even less likely to support global institutions and less likely to see international law as a positive tool for resolving problems. In the end, disaffected groups will support policies that challenge or obstruct efforts to integrate national economies into global trading regimes.
Investor enforcement is a potent basis for expensive litigation, the very threat of which gives overseas investors additional power in dealing with central government, and local government if central government (as is likely) passes on the results of a dispute. Note that it is discriminatory in that the same power is not available to New Zealand investors with respect to the New Zealand government – although they could gain it by owning their companies through a Hong Kong subsidiary!
The IPPA makes arbitration mandatory when a dispute between investors and the government cannot be resolved amicably and procedures for settlement have not been agreed within six months. The precedents outlined above give strong incentives to the investor not to settle amicably. International arbitration awards made outside New Zealand are enforceable against the New Zealand government in New Zealand domestic courts under the Arbitration Act 1996, except where the court finds that the subject matter of the dispute is not capable of settlement by arbitration under New Zealand law, or the recognition or enforcement of the award would be contrary to the public policy of New Zealand. That would prove a most unreliable backstop for the government if it considered that it was not in New Zealand's interests for it to settle with the investor or for the dispute to proceed.
It is also important to compare the IPPA's disputes procedure with that under the SNZCEP. If negotiations towards a FTIA proceed, then the IPPA and the FTIA will need to be made consistent. Although the SNZCEP has no expropriation provision, it has an even stronger investor-government disputes procedure than the IPPA. So it is likely that the IPPA's disputes procedure will be strengthened (becoming even more threatening) if an FTIA is completed.
SNZCEP's Article 34 parallels the IPPA Article 9 provision for investor enforcement. The SNZCEP article differs from that of the IPPA in two main respects. First, the arbitration (if no other procedure is agreed) is under the International Centre for Settlement of Investment Disputes (ICSID), rather than UNCITRAL. That has an escape provision that allows a country to withhold its consent to arbitration. The second difference between the SNZCEP and the IPPA provisions is that that escape provision is provided for, which would allow New Zealand to refuse arbitration. However, whether that escape route would be used is doubtful: recent New Zealand governments have been much more preoccupied with retaining “investor confidence” than the integrity of the country's policy options. There is also an expectation that a government enters into an agreement with the intention of complying with it. They would recite those arguments in meekly submitting to the disputes procedure. Once into ICSID arbitration, the outcome is directly enforceable in New Zealand courts through the Arbitration (International Investment Disputes) Act 1979, a stronger position than under UNCITRAL under the IPPA. ICSID procedures have the same weaknesses as UNCITRAL as described above.
The SNZCEP also has stronger national treatment provisions than the IPPA, preventing a government from giving favourable treatment to local citizens or companies.
The SNZCEP provisions are discussed in more detail here.