Talking Trade blog
TPP impressions: Competition and State Owned Enterprises (SOEs)
Published 17 November 2015
In our continuing effort to unpack the Trans-Pacific Partnership (TPP) agreement and do the hard work of pouring over long, dense and frequently mind-numbingly dull pages of the trade agreement, this post reviews the rules and schedules for competition and state-owned enterprise (SOE) chapters (16 & 17).
As might be expected for someone sitting in Singapore for more than a decade, questions have come in thick and fast regarding the specifics of what will happen on SOEs. With the caveats up front that I am not a lawyer and can be hesitant to discuss highly sensitive domestic issues, it seems that these chapters deserve at least a blog post. They demonstrate the careful balancing act found throughout the TPP between encouraging fair trade between members and allowing governments to pursue a variety of public policies in the public interest.
Free trade agreements (FTAs) do not always cover competition policy and none has tried to address SOEs directly. Why include these highly sensitive topics in the TPP? This question may seem even more puzzling because, depending on how SOEs are defined, every state is likely to harbor at least one. For some TPP member countries, SOEs account for significant shares of the domestic economy. So why bother with fraught negotiations in this area?
The primary reason given by TPP officials is that many of the benefits of an FTA could be undermined if competition in both goods and services is not free and fair. Three elements are especially important to ensure fair competition: non-discrimination, transparency and due process.
Chapter 16 spells out in detail the rules related to ensuring how all three objectives will be met by member states, including all the necessary legal procedures to be followed. Member states are allowed, as in the rest of the agreement, to have transparent exemptions for public interest or public policy grounds.
Given the different histories of the member states in addressing competition policy (and policy vis-à-vis SOEs more specifically) the agreement also includes provisions for cooperation between members. Member states are required to have and to follow domestic rules to protect consumers from fraudulent and deceptive commercial activities.
Note, however, that Chapter 16 is not subject to dispute settlement using TPP mechanisms (SOE provisions, by contrast, in Chapter 17 are enforceable). Brunei was granted an extra time to complete the creation of domestic competition policies and laws, including the creation of a national level competition authority.
The far more controversial portion of competition can be found in Chapter 17 on SOEs. Again, depending on how these are defined, TPP members have many entities, agencies, and companies that might reasonably fit a definition of "state owned." Early discussions in the TPP focused on strengthening the competition chapter sufficiently on its own to ensure competitive practices and compliance with anti-monopoly regulations. However, this was seen as insufficient given the scale and scope of some current (and potentially future) TPP member SOE firms.
Hence TPP officials crafted an additional 36 page agreement, accompanied by country-specific annexes detailing exceptions to SOE commitments for individual members. As noted further below, many of these exceptions are quite sweeping in nature. The final result is likely to represent a modest first-step forward in disciplining unfair advantages that SOEs can have in markets.
After much painful wrangling, officials settled on the following definition of a covered SOE: an enterprise engaged in commercial activities with either: direct government ownership of more than 50% of share capital; ownership interests that results in control over more than 50% of voting rights; or where members have the ability to appoint the majority of members of the management body (members of the board or equivalent). Note that TPP member states are not required to privatize SOEs and are not prevented from creating new ones.
The specific area of focus is ensuring that SOEs compete fairly when they are engaged in providing commercial activities. Commercial activities are actions undertaken by an SOE for the purpose of making profits (not-for-profit or cost-recovery actions are excluded) while making goods or services that are sold to consumers in situations where the firm decides how much to provide and at what price.
This chapter contains extensive legal language to try to focus the rules as specifically as possible on certain entities while allowing others to continue as before. Broad exceptions include SOEs involved in monetary policy like central banks, certain types of financial services suppliers, sovereign wealth funds, pension funds, and entities engaged in government procurement.
All other SOEs are supposed to operate using non-discriminatory commercial principles, including when purchasing or selling goods and services directly, or when working with other SOEs. The TPP includes new transparency rules that require members to clearly identify SOEs and specific programs of assistance (when requested to do so by a TPP member).
State owned firms can receive benefits that non-state owned firms do not receive. The TPP tries to address some of these issues by requiring that any non-commercial assistance should not harm competitors. Chapter 17 lays out at length the rules around what constitutes injury and how such claims should be addressed.
Not every SOE is subject to the rules. Annex 17-A outlines the threshold level an SOE must meet: currently set at 200 million Special Drawing Rights. (The website CoinMill.com shows the following conversion rates: 1 million SDRs=USD$1.38 million.) This threshold is to be adjusted every three years. New negotiations on potential extensions of the agreement are due within five years of entry into force.
Most of the SOE commitments apply only to firms operating at the federal level of government. Annex 17-D outlines many extensive, specific exemptions claimed by each TPP member state for sub-federal (or sub-central) SOEs. Singapore, which does not have a sub-federal level at all, created a special annex, 17-E, to cover its own exemptions. Malaysia also created a special annex for Permodalan Nasional Berhad and Lembaga Tabung Haji.
Other exceptions to the SOE rules can be found in the country-specific annexes IV to the agreement. Recall that, unless specific non-conforming measures (NCMs) are listed, SOEs are subject to the terms of the agreement. Hence, many governments appear to have been extremely conservative in listing NCMs or exceptions to coverage. As an example, although the agreement clearly notes in multiple places that sovereign wealth funds are excluded, Singapore specifically listed a variety of activities that may be related to Temasek and GIC that can continue after the TPP enters into force.
NCMs can include either broad categories of activities or list specific entities. An example of a broad exemption is Vietnam’s coverage of “all current and future activities” of SOEs owned or controlled by the Ministry of Defense of Viet Nam or the Ministry of Public Security of Viet Nam, except Viettel Global JSC., and enterprises exclusively engaged in commercial activities not related to national defense, public order or public security. Malaysia carved out the broad category of all Bumiputera enterprises and specifically listed commitments related to Petroliam Nasional Berhad (PETRONAS), its subsidiaries or any new, reorganized or successor enterprise.
The scale of exemptions like these, coupled with high threshold levels and application of the rules to SOEs largely at the federal or central level only, means that the extent of disciplines related to SOE activities in the future is hard to discern. Since the TPP represents the first time governments have tried to address competitiveness challenges arising from SOE actions, it may have been wise to take limited steps. Many governments view their own SOEs as providing important or even vital services and were clearly reluctant to wade in too deeply with new commitments at this time.
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