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Foreign Affairs, Defence and Trade Legislation Committee

RANALD, Dr Patricia Marie, Convenor, Australian Fair Trade and Investment Network


CHAIR: I now welcome Dr Patricia Ranald from the Australian Fair Trade and Investment Network. Dr Ranald, thank you very much for your submission, which we have as 105, and for appearing today. Perhaps you would like to make a brief opening statement to introduce your submission.

Dr Ranald : The Australian Fair Trade and Investment Network is a network of 60 community organisations. The largest single group is church groups. It also includes unions, environment groups, public health groups, human rights groups, and aid and development organisations, at both state and national levels.

I should say that my background is that I have a PhD in international relations and I publish quite widely in refereed books and journals on the social impacts of trade agreements, and some of those publications are referred to in our submission. ISDS basically gives additional special rights to foreign investors to sue governments for damages in an international tribunal on the basis of a claim that domestic legislation or policy has harmed their investment. It has developed from a system that originally was about compensating for the actual expropriation of property—real property. But over the years, particularly the last 20 years, it has developed into a system based on principles of indirect expropriation that simply do not exist in most legal systems and that are not available to domestic investors. In that sense it is not about free trade; it is about giving special preferential treatment to foreign investors compared with domestic investors. The Howard government did not agree to it in the Australia-US Free Trade Agreement in 2004, and that is precisely why the Philip Morris company, which is a US company, had to go and find another agreement—the Hong Kong agreement—to sue under and the Productivity Commission study rejected it in 2010, leading to the previous government policy against ISDS.

The tribunal system has two fundamental flaws, which means that it lacks the basic legal standards of most domestic legal systems, which ensure independence and consistency of decisions. Firstly, there is no independent judiciary. Arbitrators are selected from investment law experts who, in the main, have represented investor complainants, because the system is set up in such a way that only investors can complain under the system—and they can be an advocate one month and an arbitrator the next. We regard this as unacceptable as a legal principle. In Australia and in most other legal systems judges cannot continue to be practising lawyers once they become judges, because of the obvious potential conflict of interest. In this system, arbitrators are also paid by the hour, because they are not employed as permanent judges, and there is an incentive therefore for the cases to take a very long time—and indeed they do take between three and five years. So it is not an expeditious system and it does not have an independent judiciary.

Secondly, there is no system of precedents or appeals. This means that decisions about cases with similar facts can be inconsistent. Again, in our legal system and in most legal systems, independent judges must take note of previous decisions in an agreed and systematic way, and there are appeals systems which help to ensure consistency. Although many proceedings are held in secret so we only have incomplete data, the data that we have shows that there has been a steep rise in cases over the last decade, including cases in which foreign investors have sued over health and environmental legislation. I should say that these are not only old cases—I will just give you some examples: in 2012, there was a case brought by a US mining company over the environmental regulation of mining in Canada. There is also a relatively recent case over environmental regulation of mining in Peru and of course the tobacco cases against not only Australia but Uruguay attempting to circumvent regulation of tobacco advertising.

The case that I am sure you heard about of the Eli Lilly pharmaceutical company is a recent case brought in 2012 against a court decision in Canada over a refusal to grant a patent. There is also a 2012 case, which is of particular interest to those interested in labour rights. The Veolia waste disposal and water company, an international company based in France, is suing the Egyptian government over a dispute about a government contract which was granted to Veolia. One of the bases of their complaint about alleging that the Egyptian government has acted in a way contrary to that contract is that, after the Egyptian revolution in 2011, the minimum wage in Egypt, which was very low, was raised for the workers employed by Veolia. So they are making a complaint under ISDS against the raising of the minimum wage for workers.

Our submission has an appendix which documents that the President of the World Health Organization criticised tobacco companies for using ISDS as part of a very concerted global strategy against tobacco regulation.

These cases are also very expensive. A recent OECD study shows that legal costs average $8 million and can be as high as $30 million. Damages against governments have gone up to $1.8 billion. Even if governments win, they face huge legal costs.

Many governments are in fact reviewing and/or withdrawing from agreements containing ISDS, and these are not only Latin American countries. There are 10 Latin American countries which met last year but include large countries like Brazil and Argentina and agreed to establish an alternative regional system.

South Africa has reviewed ISDS in its bilateral investment treaties and has decided not to enter into any new treaties containing ISDS. In our region, both the Indian and the Indonesian governments are also reviewing ISDS and putting on hold entering into any new treaties containing ISDS.

The German government earlier this year criticised the inclusion of ISDS in the Transatlantic Trade and Investment Partnership with the US. The new President of the European Commission made a statement, which I will quote from, just in the last two weeks, which says he is opposed to ISDS. He said:

Nor will I accept that the jurisdiction of courts in the EU Member States is limited by special regimes for investor disputes.

He added that:

The rule of law and the principle of equality before the law must also apply in this context.

I can send you the link to that statement.

CHAIR: That is probably a good spot to ask you to stop. If, in answer to questions, you do not pick up on other points you were going to make, I will invite you to conclude, but I do want to make sure there is plenty of time for questions. Thank you. Senator Gallacher will commence with questions.

Senator GALLACHER: Dr Ranald, I have a couple of questions that I suppose are more for my education than anybody else's. In terms of Australia's trade, how critical are these ISDSs given our historical record is that we have taken three and someone has taken one? Is our trade really not of the category or type that lends itself to these investor-property disputes or intellectual property disputes, and the only example we have is simply the public health case, the Philip Morris case?

Dr Ranald : I think that is a significant case, but historically Australia has had no problems in attracting foreign investment, so there is certainly no argument. We have always welcomed foreign investment. I, and I am sure all members of your committee, welcome foreign investment. It is not as if Australia had a problem obtaining foreign investment before we signed any ISDS treaties, and there is no evidence that there has been additional foreign investment from signing those treaties, particularly since most of them are with developing countries, from which most foreign investment does not come. Most foreign investment in Australia comes from countries like the US, Japan and other developed countries. I would say that we do not need ISDS in Australia in order to attract investment.

In relation to the point about Australian companies using ISDS, information about this was not available when the Productivity Commission made its report, simply because the cases are secret—or in the past they have been secret—and you do not find out about them until the case has concluded. I would also point out that two of the cases that are cited as being Australian based companies are actually international companies with Australian subsidiaries. I would not say again that Australian based businesses have relied on ISDS in order to conduct their business in other countries.

Senator GALLACHER: You would basically say that if we did not have ISDS it would have minimal effect on Australia's trading position?

Dr Ranald : That is right, I would.

Senator GALLACHER: Both with investors coming in and exports going out?

Dr Ranald : Yes. It has nothing to do with exports per se; it is only about movement of investment. Again, I do not think that Australian companies have been inhibited in investing overseas because of a lack of ISDS.

Senator GALLACHER: Just to touch on the Veolia case, in a previous life I had some dealings with Veolia; it is a big company. How is it possible under international law that they would not have had a case anyway? If someone comes in and doubles the rate of labour in a contracted position, they would have had a redress anyway.

Dr Ranald : It was not doubled. There was a rise in the minimum wage under domestic law and, according to the Egyptian government, they should have been obliged to pay a normal wage rise. But they are citing that as one of the reasons for their suit against the Egyptian government. To me, this is a very good illustration of the dangers of ISDS, because none of the exceptions that we have talked about in the Korea FTA, for example, would deal with such a case. There is no exception for labour law, and in fact in the Korea FTA the mentions of labour rights are very weak and they are not enforceable, even under the government-to-government disputes process in that agreement. There is nothing, for example, in the Korea FTA ISDS safeguards to prevent a company from citing a change in labour conditions as one of the reasons why they might take a case. To my mind, that is a basic problem about sovereignty and democracy. A government should have the right to have an industrial relations system, which we do have in Australia, which makes decisions about things like the minimum wage under its own legal system. They should not be able to be challenged by a foreign investor under a system which has no independent judiciary and no precedents or appeals.

Senator GALLACHER: Is there an example you could cite there that could potentially clarify the point that you are making?

Dr Ranald : The example is that the Egyptian government is being sued by a French company under a French bilateral investment treaty with Egypt. That is the example, and they are citing the rise in the minimum wage as one of the reasons for claiming damages.

Senator GALLACHER: There was not a minimum wage when they had the agreement?

Dr Ranald : It is a bilateral investment agreement which gives them access to these tribunals that we are talking about.

Senator GALLACHER: I do not want to delay the hearing, but there was no minimum wage in Egypt prior to the decision?

Dr Ranald : There was a minimum wage, but it was very low. This was the raising of the minimum wage.

Senator GALLACHER: We understand that in China the minimum wage gets doubled every six months. This is a normal part of an economy working.

Dr Ranald : I think you are supporting the point I am making. I am saying that things like decisions about the minimum wage should be the province of a domestic legal system. They should not be able to be challenged by a foreign investor in an international tribunal. That is my point.

Senator WHISH-WILSON: You mentioned you have got a very diverse membership at AFTINET. I must admit I have met them at some forums I have spoken at—your church groups, for example. What it is the key concern that they have got?

Dr Ranald : What we advocate is: we support international trade but we want international trade agreements and systems based on human rights, labour rights and environmental sustainability. So we want governments, as well as committing to free trade, to commit to certain principles in regard to those other international agreements which Australia is also a party to.

Senator WHISH-WILSON: Are you concerned there are double standards in existing agreements and, potentially, in future agreements, where, for example, issues on the environment or labour are not as binding or are a lot more difficult to get—

Dr Ranald : What I would say in relation to ISDS is that ISDS gives additional rights to foreign investors over and above what domestic investors have, but they certainly give additional rights to foreign investors to challenge domestic laws which may be made as part of protecting or advancing human rights or environmental sustainability. Those are the kinds of examples that we cite in our submission. So our worry is that ISDS has the potential to undermine or challenge domestic law which seeks to protect those broad principles of human rights and environmental sustainability.

Senator WHISH-WILSON: Are you aware of a report recently by Maude Barlow, from Canada—I am happy to table this—talking about the use of ISDS to access the national commons in various countries, such as the ownership of water rights and other—

Dr Ranald : I am aware generally of her work on water. I have not had time to read that particular paper. I would make the point, though, that in Australia, if we are talking about the Korea-Australia FTA—and this may go to Senator Gallacher's question about examples too—Korean investors are actually well represented in mining projects in Australia. In New South Wales, farmers and rural communities have successfully campaigned for improved environmental regulation of mining projects so that they should not be near water tables, farmland, communities et cetera. Three of the most controversial mining projects around which this debate has happened in New South Wales are actually owned by Korean investors—the KORES Wallarah 2 project on the Central Coast, the POSCO owned Hume project in the southern highlands and the KEPCO mine in the Bylong Valley. As a concrete example, if KAFTA is ratified, in my opinion, the safeguards would not prevent any of those companies, in the event that they were refused a licence for mining on environmental grounds, from proceeding with an ISDS case. So that is an example of where it could happen.

Similarly, if the New South Wales government or any other state government proceeded to have more environmental regulation of mining after KAFTA was signed then that regulation or law could also be challenged through an ISDS case, because the exception in KAFTA which refers to attempts to exclude environmental cases begins with the words 'except in rare circumstances'. That is a very broad exception and, in my opinion, does not exclude the possibility of cases being taken against environmental regulation. We have, as I said, Korean mining companies who are embroiled in disputes about environmental regulation now.

Senator WHISH-WILSON: Considering how broad your stakeholder group is under the umbrella of AFTINET, did you have consultation on these issues during the Korean free trade negotiations?

Dr Ranald : There was very little consultation during the last part of the negotiations. What the department of foreign affairs does is once or twice a year it holds briefings for interested parties. With the Korea free trade agreement negotiations went on for several years. So there were some briefings, but the briefings are only at the most general level. There was no discussion of the detail of the text.

When there was a change of government at the end of last year the Korea free trade negotiations resumed but there were no briefings that we were informed of about those negotiations. I saw the transcript of the evidence given by the Australian Chamber of Commerce and Industry on that agreement and they claimed that they were not consulted about the detail of the agreement either. So I think that agreement was concluded quite hurriedly, with very little consultation. I was surprised, for instance, that even the Australian Chamber of Commerce and Industry made that point.

But we do have a more general criticism of trade agreements, and that is firstly that the briefings are very general and the devil is in the detail in trade agreements. It is very difficult to comment if you do not have the detail. Secondly, the decision to sign the agreement is made before it is released publicly. So the cabinet authorises the signing of the agreement before it is released publicly and then it is reviewed by parliamentary committees. We believe that should be reversed. The text of the agreement should be published before it is signed so that there can be a proper public and parliamentary debate to ensure that all the possibilities in the agreement are fully explored before the government is committed to it.

Senator WHISH-WILSON: If we had had a different process for KAFTA or in relation to current negotiations on the trans-Pacific partnership agreement that allowed for that level of public input, do you think your concerns about ISDS, for example, may have been better represented? I understand DFAT say they meet and discuss and that they are very clear about that, but that does not give any indication that they actually listen to what you are saying or that it is incorporated in any of their negotiations.

Dr Ranald : Certainly we would prefer to have a situation, as occurs in the WTO, actually, where draft texts are made available for public discussion. In our opinion that would ensure a better result at the end, because it allows a full range of opinions, ranging from that of the chamber of commerce to AFTINET's, to have an impact on the negotiations before decisions are made.

Senator WHISH-WILSON: I want to ask you a question that has been raised all day. We are talking about a bill that is looking at banning ISDS. Are you comfortable with exceptions and carve-outs and the move to try and improve these clauses?

Dr Ranald : I think it is very clear, including from Professor Nottage's evidence, that the carve-outs in our existing agreements are not adequate. There is a strong body of academic opinion which suggests that the carve-outs in the Korea free trade agreement are not adequate. The paper from the 100 academics on the European Commission's proposed carve-outs, which are far more extensive than the Korea FTA carve-outs, also argues that they are not adequate.

The main reason for this goes back to the structure of these tribunals. The problem with the carve-outs is that they still leave discretion to the tribunal to decide whether this is an exceptional circumstance and, in the case of customary international law, what definition to use and how to apply it. Even though there have been more restrictive definitions adopted by some governments, and there have been attempts to put them into trade agreements, the tribunals do not necessarily have to take note of those. In some cases they have gone back to less restrictive definitions.

There is also the whole area of fair and equitable treatment. A lot of discretion is given to the tribunal so that it can decide whether a particular regulation is necessary, in its view, whether it is proportional to the obligations and whether it is proportional to the object of the legislation. What is the legitimate expectation of an investor not to have to face new regulation? In all of those things incredible discretion is given to a tribunal which is not made up of independent judges and to which there is no appeal. It is very difficult, given the structure of the tribunal system, to see how you can have exceptions which are strong enough in that situation.

CHAIR: Thanks, Dr Ranald. It is a very interesting discussion. Can I put a couple of things to you. In their submission, DFAT argue that the bill as proposed may have some unintended consequences in that the bill will prevent the government from seeking to update agreements containing ISDS should they wish to do so in future. Is that something you have turned your mind to? Could you comment on DFAT's concern there?

Dr Ranald : My understanding of the bill is that it simply says that Australia should not enter into agreements from now on which contain ISDS. It leaves open the question of how past agreements should be reviewed. So no, I do not agree with that statement.

CHAIR: I suppose I should have addressed the question to its author.

Dr Ranald : I would make the point that again Professor Nottage, who is generally a defender of the system, has said that maybe we should be looking at reviewing some of our past agreements, given how badly worded they are. In fact, he was talking about developing a different kind of model as well. I am not sure we would agree about the model. But I do not think that that argument really holds.

CHAIR: I guess it is a question we will also point to DFAT. Senator Whish-Wilson may indeed care to comment himself. I will again quote from DFAT's own submission. They make this point about the bill:

As drafted, it would prevent Australia from entering into a plurilateral agreement which contains ISDS, whether or not Australia agrees to be bound by that particular provision. This does not recognise the possibility that an agreement could contain ISDS provisions which apply between a subset of the parties—

to which Australia does not subscribe.

It is not clear if this is the intended operation, however DFAT considers it would be undesirable to prevent Australia from entering into an agreement on this basis.

As I understand what they are saying, the capacity exists in an agreement with multiple other countries for Australia to elect to not participate in certain elements but still go forward. The concern is that, as the bill appears to be drafted at the moment, if we are not prepared to participate in the ISDS component we may well be excluded from the agreement altogether. Is that something that you would agree with? Do you also agree that it would be an area of concern?

Dr Ranald : Empirically, I don't think that is true, because I do know for a fact that in the Australia-New Zealand-ASEAN agreement Australia and New Zealand have agreed not to apply ISDS provisions to each other.

CHAIR: That economic agreement between Australia and New Zealand is a particular type, isn't it?

Dr Ranald : No, they are both part of a plurilateral agreement amongst them and 10 other ASEAN countries. All the other aspects of that agreement still apply. So that did not seem to have been a problem in that particular agreement. Australian and New Zealand were able to say, 'We opt out of applying that to each other.'

CHAIR: I guess the question becomes: if the bill as drafted is passed, would that in fact prevent a future occurrence of exactly the type that you have just described.

Dr Ranald : I would have to look at the bill again. I am not sure about that point.

CHAIR: We have no further questions. Thank you, very much, for your submission, for your appearance here today and for the depth of the discussion that you have been able to engage in with us.

Proceedings suspended from 12:30 to 13:28