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Reach of TPP’s SOE disciplines limited by definition, scope, exceptions

World Trade Online | 5 November 2015

Reach of TPP’s SOE disciplines limited by definition, scope, exceptions

Ben Hancock

The text of the Trans-Pacific Partnership (TPP) agreement reveals that the parties have agreed on groundbreaking new rules aimed at preventing state-owned enterprises (SOEs) from harming privately owned firms, but with numerous exceptions that limit the reach of these new disciplines in a variety of ways.

The text shows that these boundaries are drawn not only through the definition of what constitutes a state-owned enterprise, but also by creating a company revenue threshold below which the rules do not apply. TPP parties also agreed to limit the scope of activity covered by the rules, crafted general exceptions, and agreed on carveouts for SOEs operating at the sub-central level, according to the text.

In addition, Singapore and Malaysia have secured annexes to the text of the SOE chapter — Chapter 17: State-Owned Enterprises and Designated Monopolies — that ensure the ability of some of their state-owned firms to shrug off the new TPP obligations, provided they adhere to certain guidelines.

Beyond that, each TPP country except for Singapore and Japan have their own schedules for "non-conforming measures," or NCMs, that are further exceptions from the new disciplines. Some of these NCMs, at least on their face, appear quite broad, while others are narrowly tailored to the activities of specific existing firms.

Vietnam, which has the largest number NCMs in this area, has secured some exceptions that apply to all its state-owned firms and designated monopolies. For example, under one of its 14 NCMs, these entities will not be bound by requirements to act in accordance with commercial considerations in the domestic purchase or sale of a good.

The NCM states that Vietnam may, "pursuant to laws or regulations, require a state-owned enterprise or a designated monopoly: (i) to sell or purchase goods at a regulated price, quantity or other terms and conditions; and (ii) produce or sell a good to the public, as defined in laws and regulations" within its territory.

Under the same provision, Vietnam or its SOEs may also provide non-commercial assistance to cover the "reasonable costs" of selling or purchasing those goods.

The United States, by contrast, has taken three NCMS to the SOE chapter, including one to safeguard its ability to create a "national infrastructure bank" in the future. A second exemption covers the Federal Financing Bank and a third covers federal mortgage lenders Fannie Mae, Freddie Mac and Ginnie Mae.

The obligations of the SOE chapter fall broadly into three categories: ensuring that SOEs act "in accordance with commercial considerations" in the purchase or sale of a good or service; preventing TPP parties from causing "adverse affects" to the interests of other parties through non-commercial assistance; and creating greater transparency around the behavior and ownership structure of SOEs.

The company revenue threshold under which the rules do not apply is set at 200 million Special Drawing Rights (SDRs), a monetary unit set by the International Monetary Fund based on a basket of currencies. This is equal to about USD$143.88 million, according to calculations made based a conversion table from the IMF.

This is higher than the threshold in the U.S.-Singapore FTA, which was 50 million Singapore dollars, or about 97.145 million SDRs.

The TPP establishes a two-pronged SOE definition. First, an enterprise must be "principally engaged" in commercial activities. Second, the government of the TPP party must directly own more than 50 percent of the share of capital; control, through ownership interests, the exercise of more than 50 percent of the voting rights; or hold the power to appoint a majority of members of the board of directors "or any other equivalent management body."

An aide for the House Ways & Means Committee criticized this definition as creating a loophole for firms in which the government is heavily invested, but below the 50 percent ownership threshold, and where other shareholders individually have smaller stakes in the company than the government.

But another expert pointed out that the criterion relating to the power to appoint a majority of board directors could feasibly capture that scenario, and said that the definition at first blush appeared "reasonable."

The TPP definition is significantly narrower than the language in the U.S.-Singapore FTA, which included a chapter on Anticompetitive Business Conduct, Designated Monopolies and Government Enterprises that was not as far reaching in its disciplines as the TPP.

As one of the obligations in that chapter, Singapore committed that any "government enterprise" would act "solely in accordance with commercial considerations in its purchase or sale of goods or services," such as with regard to price, quality and availability. The FTA defined a government enterprise as any entity in which the government has "effective influence."

Under the FTA, effective influence exists when a government or government enterprise owns more than 50 percent of the voting rights of the entity, or has "the ability to exercise substantial influence" over the composition of the board of directors or any other managing body of an entity.

Effective influence also exists if the government can determine the outcome of decisions on the strategic, financial, or operating policies or plans of an entity, or otherwise exercise substantial influence over the management or operation of an entity.

"Where the government and its government enterprises, alone or in combination, own 50 percent or less, but more than 20 percent, of the voting securities of the entity and own the largest block of voting rights of such entity, there is a rebuttable presumption that effective influence exists," the Singapore FTA text says.

The scope of the SOE chapter is narrowed to the TPP region only by specifying that the disciplines apply "to the activities of state-owned enterprises and designated monopolies of a Party that affect trade or investment between Parties within the free trade area."

The scope provisions also say that nothing in the chapter prevents a party, or one of its state or state-owned enterprises "from undertaking activities for the purpose of the resolution of a failing or failed financial institution" — language that appears to give policy space for a major bank bailout akin to those that took place after the 2008 crisis.

There are also provisions that limit the applicability of the disciplines to sovereign wealth funds, and independent pensions funds or enterprises controlled by such funds. In Singapore’s annex, it states that sovereign wealth funds include GIC Private Limited and Temasek Holdings (Private) Limited.

As previously reported by this publication, the chapter’s obligations also are tailored not to apply to services supplied by an SOE in its home market (Inside U.S. Trade, Feb. 28, 2014).

The parties have in addition negotiated general exceptions stating that nothing in the chapter prevents the adoption or enforcement of measures to respond "temporarily" to a national or global economic emergency.

The exceptions also say that the non-discriminatory treatment and commercial consideration rules shall not apply with respect to the supply of financial services that support exports or imports. This would appear to carve-out export credit agencies like the Export-Import Bank.

However, this exception is conditioned on these financial services being "not intended to displace commercial financing," or are "offered on terms no more favourable than those that could be obtained for comparable financial services in the commercial market."

Each of the countries, to varying degrees, have also exempted entities controlled by sub-central levels of government from the core TPP obligations. For the United States, this includes almost every single obligation.

One obligation that has not been exempted by the U.S. for sub-central SOEs, however, has to do with courts and administrative bodies. "Each Party shall provide its courts with jurisdiction over civil claims against an enterprise owned or controlled through ownership interests by a foreign country based on a commercial activity carried on in its territory," that provision, Article 17.5.1, states.

"This shall not be construed to require a Party to provide jurisdiction over such claims if it does not provide jurisdiction over similar claims against enterprises that are not owned or controlled through ownership interests by a foreign country," it adds.

In addition to Singapore, Malaysia has also negotiated with the TPP parties a special annex limiting the applicability of the chapter to Permodalan Nasional Berhad, an asset management firm, and Lembaga Tabung Haji. The latter is a government-linked financial organization that provides savings services to Muslims who are planning pilgrimages to Mecca, according to a company profile by Bloomberg.

The U.S. and Singapore have also negotiated a side letter establishing that Singapore may satisfy some of the SOE transparency obligations of in its bilateral FTA with the U.S. by meeting the obligations of the TPP deal.

 Fuente: World Trade Online