Emerging Issue: The signing of the Trans Pacific Partnership presents implications for energy investments in Australia.
The Trans Pacific Partnership Agreement (TPP) – which will see the elimination of 98% of tariffs among 12 Pacific Rim nations(1) that in total account for 40% of global GDP – was formally signed on 4 February 2016, by Australia’s Minister for Trade and Investment, Andrew Robb.
The TPP has been years in the making and covers a wide range of market access issues for both goods and services, with much of the text going beyond traditional issues of free trade agreements, encompassing items such as: electronic commerce, government procurement, intellectual property, labour, environment, competitiveness and inclusiveness, and the participation of state-owned enterprises (SOEs) in international trade and investment.
For the energy sector, the Australian Government expects the TPP to create major new opportunities for Australian miners to expand exports and developments in the region, notably with regards to regulations concerning the conduct of SOEs, which have a dominant presence in some TPP countries.
On the domestic front, the TPP can also be expected to influence investment outlooks within Australia. Marchment Hill Consulting highlights the following four key areas of the TPP for consideration in foreign investment in Australia’s energy sector.
1. Foreign Investment Review
The screening thresholds for consideration by the Foreign Investment Review Board (FIRB) are to be increased from $252 million to $1,094 million for all TPP countries in non-sensitive sectors. While this would not impact the major privatisations currently underway in NSW, smaller future industry transactions would likely be encouraged.
2. Mobility of foreign executives
Greater access will be afforded to foreign labour in terms of the temporary entry of business persons, with provisions enhancing entry and labour mobility for companies looking to transfer executives and managers.
3. Environmental Regulation
Whilst the term ‘climate change’ is absent from the TPP text, the Environmental Chapter does contain content promoting cooperation between TPP Parties on matters of mutual interest which relate to transitioning to low emission economies, such as cooperation on clean and renewable energy sources, deforestation and emissions monitoring.
In a related issue, the TPP also controversially contains Investor-State Dispute Settlement (ISDS) provisions, a common trade agreement mechanism, but one which faces much ongoing criticism and concern in terms of potential implications to national sovereignty and democratic oversight of regulations in the public interest(2).
In this regard, the Australian Government is firm in its position that the TPP has been drafted to incorporate explicit safeguards to protect the right of governments to take decisions in the public interest, including in the areas of health and the environment. However, this space is likely to face ongoing scrutiny and subsequent testing.
4. Investor-State Dispute Settlement (ISDS)
As included in the TPP, ISDS provisions enable investors with the right to access an international tribunal if they believe actions taken by a host government breach its investment obligations. Internationally, ISDS provisions have encompassed a range of issues and associated compensation claims relating to the energy sector, such as: expropriation of assets, revocation of licences and permits, reforms of subsidies and tariffs, and land zoning decisions.
In Europe, for example, ISDS provisions contained within the Energy Charter Treaty have been used frequently to challenge regulatory and policy changes. The Swedish energy company Vattenfall took Germany to court over its policy to phase out nuclear power in the aftermath of the Fukushima disaster, and has been used by multiple companies to challenge reforms to subsidies and scheduled feed-in tariffs(3).
In Australia, whilst these provisions would allow foreign investors to better manage risks, regulatory issues may be present in terms of electricity market and industry reforms that would impact the valuation of foreign investment in network businesses – for example, changes to their revenue models and incentives, as well as changes to rules or approaches to asset write downs in the face of low asset utilisation.
Implementation of the TPP is currently facing its final hurdle, being recently tabled in the Australian Parliament for a National Interest Analysis on 9 February 2016, where it will stand for 20 joint sitting days before binding ratification processes can commence.
For further reading, go to: http://dfat.gov.au/TRADE/AGREEMENTS/TPP/Pages/trans-pacific-partnership-agreement-tpp.aspx
(1) The TPP encompasses the economies of: Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, United States of America, Vietnam
(2) See for example: French, R (2014) ‘Investor-State Dispute Settlement — A Cut Above the Courts?’, Supreme and Federal Courts Judges’ Conference, Darwin (http://www.hcourt.gov.au/assets/publications/speeches/current-justices/frenchcj/frenchcj09jul14.pdf)
(3) For the UNCTAD review of ISDS cases go to: http://investmentpolicyhub.unctad.org/ISDS/FilterByEconomicSector
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