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Why ISDS clauses are one of the most insidious trends in modern trade deals

Speeches in Parliament
Penny Wright 12 Feb 2015

Senator WRIGHT (South Australia) (10:51):  I rise to speak in support of this Greens legislation: the Trade and Foreign Investment (Protecting the Public Interest) Bill 2014. The purpose of this bill is to prevent the Commonwealth from entering into an agreement with one or more foreign countries that includes particular mechanisms called investor-state dispute settlement clauses, or ISDS clauses. The inclusion of these mechanisms is one of the most insidious trends that we are seeing in modern trade deals.

I applaud Senator Whish-Wilson's great work in bringing this bill forward and encouraging debate on what has the potential not only to shape the kind of world that we bequeath to our kids and our grandkids into the future but to fundamentally undermine the rule of law and democracy itself. They are high claims to make. I am sorry that Senator Macdonald is leaving the chamber, because he invited me to answer some questions that he posed, and he obviously is not particularly interested in hearing those answers. At one point, he scoffed at the idea that Chief Justice Robert French of the High Court of Australia commented with great interest on the issues that are posed by these ISDS clauses and free trade agreements. Indeed, Chief Justice French and many others have raised significant concerns, and I will come to those in the course of my contribution today.

But let's start by asking why these ISDS clauses are so troubling. It is because these are mechanisms by which private investors-corporations who are based outside a sovereign nation with no loyalty to, interest in or concern for the citizens of that nation-can take their own action against the sovereign government of the nation and use the clauses to sue governments for huge amounts of compensation if they can show that a government policy or a change in policy has directly affected their profitability or their investment. In so doing, they can exert a huge influence and control on the laws and policies of nations irrespective of the will of the democratically elected parliaments in those nations.

This Greens bill is designed to prevent the Australian government from entering into agreements that include these ISDS clauses, to prevent corporations outside Australia from being able to dictate to Australian governments, effectively, the kinds of laws they can and cannot make and-by extension, given that the laws and policies and governments shape the world that we live in-the kind of Australian society that we have. It is interesting, and Senator Milne made this point as well, that we hear a lot about border protection from this government but when it comes to protecting our legal borders-our legal sovereignty: the right of democratically elected governments in Australia to make laws on behalf of all of us and have those upheld by our courts-this government is a bit silent. In fact, they are highly secretive. Right now we have 12 governments, including those of Australia, the US, Japan, Canada and New Zealand, negotiating this far-reaching trade deal, the Trans-Pacific Partnership Agreement. Aspects of the Trans-Pacific Partnership Agreement, the TPPA, pushed by global corporate interests are seeking to radically dispose of government regulation in the name of enhanced global competition.

We have been invited by Senator Canavan to give evidence of our concerns, but the problem is that these negotiations are conducted totally in secret. So my invitation to Senator Canavan would be that if we have nothing to fear-if, in fact, these concerns that are being raised not only by the Australian Greens but throughout Australian society and internationally are not founded-then reassure us: show us the terms of the negotiations that are happening and we can all go home. In fact, this is a situation where these negotiations are in secret and, for the first time ever in trade deals, they will include discussions to get broad agreement to remove what are called unfair advantages from government state-owned enterprises and their impacts on commercial business.

One hallmark of the way these deals are negotiated is that the Australian public has no right to know what is being negotiated away in our name until the deal is done and dusted, and then it is presented to the sovereign Parliament of Australia with the only option being to vote in favour or against; there is no possibility of changing it; the deal has already been done. We see in the current negotiations for the TPPA, on the back of global corporate interests and pressure, the US government wanting to include a proposal which would allow foreign companies to sue our government and the governments under the agreement for damages if they were to adopt laws or policies that could harm the investment of these global interests. So even if they are laws and policies made in good faith on behalf of the national public interest-laws which may protect public health or the environment-there would be the capacity for outside corporations to challenge those laws and seek large amounts of compensation. That has a chilling effect on the capacity and the willingness of sovereign governments to actually govern in good faith in the interests of the national public. As my colleague Senator Whish-Wilson has already said clearly, what we have set up in these kinds of modern trade deals is a parallel system of governance which gives corporations the right and ability to impinge directly upon our ability as parliamentarians to enact legislation in the public interest-and, in the end, isn't that what we are elected to do?

These ISDS clauses have excited huge concern both nationally and internationally. Indeed, the issue has received serious consideration from many, including High Court Chief Justice Robert French, who is the most eminent judge in Australia. Chief Justice French addressed the Supreme and Federal Courts Judges' Conference in Darwin last year. He provided a very thoughtful paper, and I commend it to those who are interested in learning more about the nature and implications of these ISDS clauses. Senator Macdonald expressed disbelief that Chief Justice French may have been commenting on these issues, so I will pay him the courtesy of forwarding a copy of the paper to him, and I hope that Senator Macdonald will read that.

Chief Justice French focuses on the tensions that can exist between these ISDS mechanisms and the legitimate functions of the legislative, executive and judicial branches of governments. With respect, who would be in a better position to consider these issues in a scholarly way? He sets out the current landscape and, importantly, the implications for the rule of law in Australia.

Where there is dispute about the effect of government policy or lawmaking on corporate interests under these agreements, there is a mechanism for that dispute to then go to a system of arbitration, and there have been a great number of concerns about the conduct of the arbitration bodies as they have operated previously when considering disputes under these clauses. So, effectively, if there is government policy or lawmaking and even, indeed, decisions of courts within a sovereign jurisdiction, if a third party outside that sovereign nation wants to dispute the decision, law or policy, they can then take these to an arbitration body.

Chief Justice French in his paper refers to a briefing paper prepared by the European Parliamentary Research Service in January 2014 which describes the concerns raised about the vague formulation of major treaty provisions which leave a wide range of interpretations open to the arbitrators. There is a vagueness and uncertainty in scope and application, which is always a problem in relation to the law. There are also loopholes in these agreements, which can lead to abuses such as nationality shopping by companies, which then create subsidiaries abroad specifically to take advantage of the agreements. Indeed, that is what we have seen in the Philip Morris tobacco case that has been referred to by many of the people making a contribution to this debate.

As for the conduct of the arbitration panels themselves, particular and worrying concerns have been raised. As Chief Justice French states in his paper,

Arbitral tribunals set up under ISDS provisions are not courts. Nor are they required to act like courts. Yet their decisions may include awards which significantly impact on national economies and on regulatory systems within nation states. Questions have been raised about the consistency2, openness and impartiality of decisions made in ISDS arbitrations.

The briefing paper from the EPRS sets out some specific issues that have been raised:

  • lack of transparency with varying degrees of secrecy attaching to arbitral processes depending upon the institutions or rules which are applied;
  • a relatively small pool of arbitrators - arbitrators appointed to ISDS arbitrations are said to be mostly male-

and I guess there are no surprises there-

(95%) and from Europe and North America;

  • role-swapping by arbitrators who appear from time to time as counsel in ISDS cases;

so sometimes they are on one side of the bench and sometimes they are on the other-

  • the high cost of ISDS arbitrations - estimated by OECD as averaging about $8 million each;
  • associated with the high cost and potentially high awards, a growing phenomenon of third party funding of claims by banks, hedge funds and insurance companies in exchange for a share of the proceeds ranging from 20% to 50%;

So there is a little bit of a variation on the no win, no fee or, 'We'll fund it and we'll get a cut of the win,' which is always a real concern in terms of corrupting processes. There is also:

  • absence of effective review or appeal processes;4
  • inconsistency in decisions on similar provisions.

It is important to understand that this is not just a vague, theoretical concern that we are dealing with here. This is a live issue. There have already been many cases on foot. Last year the UN Conference on Trade and Development published its annual review of ISDS cases. Fifty-even new cases-these are cases brought by outside parties, by corporations, against governments-were commenced in 2013. That was just below the number in 2012, which was a record year with 62 cases. Most of the claims were brought against nation-states by investors from developed countries-again, no surprises there-and mainly by investors from the European Union and the United States.

And what sort of cases were being brought by these corporate interests? They involved challenges to a range of governmental measures, including measures relating to renewable energy. Why doesn't that surprise me? And who would be bringing those kinds of cases? There were measures allegedly affecting expropriation of assets, revocation of licences and permits, regulation of energy tariffs-energy into the future and the profits that are to be made there is a big one, isn't it-wrongful criminal prosecutions, land zoning decisions, invalidation of patents and sovereign bonds legislations.

As I said, many would be aware of the Philip Morris case where the Australian High Court upheld the validity of legislation made by the Australian parliament to introduce plain packaging for tobacco products. The challenge was brought by a company supported by Philip Morris Ltd to the Australian High Court, but the legislation was upheld. Four months before commencing the action in the High Court, Philip Morris Asia Ltd moved to acquire an interest in Philip Morris Australia so that it then had an interest in this subsidiary. I quote from the Chief Justice French's paper:

That acquisition is said to have reflected a tactic used by private investors seeking to take advantage of bilateral investment treaties and is known as either 'nationality planning' or 'treaty shopping'. It appears to have been related to the existence of a bilateral investment treaty between Hong Kong and Australia.

That was a treaty from 1993 which included an ISDS clause. On the basis of that clause Philip Morris is challenging the Australian government for compensation on the basis of the plain packaging laws. We will be interested in seeing what occurs there.

The Australian Greens are significantly concerned that these sorts of clauses and the actions they allow corporations to take against the Australian government and state governments have the potential to shape the kind of world we are going to be leaving to our kids and grandkids. To bring that home and illustrate why I am concerned I am going to tell you about a visit I had last Sunday when I travelled to an area near Mount Gambier in the south-east of South Australia. I attended a celebration there which was a declaration by a small land area near the little town of Mil-Lel. There was a declaration by the residents of that area of their roads and their region being gas field free. Currently there are two exploratory drilling wells from Beach Energy in that area looking for the viability of shale and conventional gas mining, and there is increasing concern among the residents in that area about the risks associated with unconventional gas mining and fracking.

There are real issues in that area, which is a rich area of agriculture, wine-growing, cropping and tourism. Also there is a very limited water supply in that area. There is a great deal of concern by the residents that unconventional gas mining will actually destroy the viability of the population, not just the economic viability, but in fact their ability to live there in a healthy way.

I went there and I was absolutely delighted to see proud citizens walking up and handing to the mayor of the District Council of Grant their scrolls-street by street, road by road-and saying, 'We do not accept that there will be unconventional gas mining in our area. We are saying that we are putting faith in the water and food supplies that we need to protect our kids and our grandkids.' When I saw that I felt that there was a strong vote of confidence in what is a real democracy, which is requiring decision-makers to make decisions that are in the interests of all people, not just in the interests of those who have power and influence and who are only interested in making short-term profits.

It is very clear that the ISDS clauses in these free trade agreements, and which will potentially be in the Pacific trade agreement, have the potential to stop our governments from legislating democratically in response to community concerns about environmental issues like mining for conventional gas. There are clear precedents for this kind of action by foreign corporations against governments when they are making law and policy that affects, for instance, energy-and that is what we are talking about here. We are talking about moving away from reliance on fossil fuels to having other sources of clean green energy like renewable energy, like solar and wind and so on.

There is an example in Quebec at the moment where, under the 1994 North American Free Trade Agreement between the US, Canada and Mexico, there was an ISDS clause. On the basis of that clause Lone Pine Resources, an energy company, is currently suing the government of Quebec for $250 million because it had the temerity to suspend shale gas mining while awaiting the outcome of an environmental study into the dangers of that mining. The suspension was brought about because of pressure from the community to examine the health and environmental impacts of that mining. The government response to the community pressure was democracy in action, and we have a large corporation currently suing the Quebec government to chill that decision in the sum of $250 million.

So in the south-east we have, at the moment, an inquiry from the South Australian state parliament into fracking in that area which was initiated by my Greens colleague, the leader of the Australian Greens in the South Australian parliament Mark Parnell MLC. What happens if there is a decision by the state government in responding to the findings of that inquiry, hypothetically speaking, that they were to decide that there should be a moratorium on fracking in the south-east? If we are subject to these sort of ISDS clauses in agreements, which the Australian government has entered into, there is every possibility that an organisation could then take action against the state government for compensation to prevent that sort of decision being made.

We are at a point in history where it is absolutely vital that people's perception that governments are only governing for the rich, the influential and the powerful is changed. There is increasing disillusionment, and I know that everybody in this chamber will be aware of it. When you go and talk to voters, people do not have faith that we are actually fulfilling the trust for which we have been elected, and that is to govern in the interests of all. This is a point in history where we must defend our democracy, and that has to start from the grassroots up. It has to start with respect for the people and for the national interest. Australian governments voluntarily surrendering sovereignty over the policy and the law that we make in this parliament is not only foolish and irresponsible but highly dangerous for the future health and welfare of this nation. But, fundamentally, I believe it is highly dangerous to this nation in being able to remain a viable democracy where our populace has faith in the decisions that we are making. If we lose that I do not know what we will have left. I urge the Senate to support the bill. (Time expired)


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