FEDERAL-STATE RELATIONS COMMITTEE
1.1 The Federal-State Relations Committee tabled its First Report, on International Treaty Making and the Role of the States, on October 14th 1997 in the Parliament of Victoria. The Findings and Recommendations of that report make apparent the need for increased State participation in Australia's treaty processes, if the States are not to find their role in the federation undermined by Commonwealth treaty action.
1.2 The Multilateral Agreement on Investment (MAI) is a treaty currently being negotiated between the member nations of the Organisation for Economic Cooperation and Development (OECD)1, and the European Union (EU). Once the agreement has been negotiated, it will be open for non-OECD, non-EU nations and regional economic integration organisations, with the consent of the treaty parties, to accede to the treaty.2 The purpose of the MAI is to establish a uniform set of rules governing foreign direct investment.
1.3 The Australian Government is taking part in the MAI negotiations. While it is not committed to signing the agreement3, it takes the view that a successful MAI would encourage investment, and therefore economic and employment growth, in Australia.
1.4 The following passage is from the Commonwealth Treasury Annual Report 1996-97:
During 1996-97, Australia continued to participate in the OECD negotiations, involving all OECD Member Countries, for a Multilateral Agreement on Investment (MAI). In May 1997, the OECD Ministerial Council Meeting, with Australia's support, expressed its determination to resolve outstanding questions on the MAI and to conclude the Agreement by the 1998 Ministerial Council Meeting [the Ministerial Council Meeting is the peak policy determination body of the OECD]. Ministers agreed that the MAI should have high standards for the liberalisation of investment regimes and investment protection and effective dispute settlement procedures. The Government will continue to participate constructively in the MAI negotiations with the objective of achieving a balanced outcome. In that context, the Government will continue to liaise and consult with interested parties within Australia, including State and Territory Governments, business groups and the trades unions.4
1.5 There are a number of areas in which the Multilateral Agreement on Investment, in the form taken by the 14 February Negotiating Text, has the potential to affect the activities of the Australian States. The MAI is thus a prime example of a treaty requiring the input of the States into its negotiation. The Federal-State Relations Committee therefore believes it appropriate to reiterate the Findings and Recommendations of its First Report on International Treaty Making and the Role of the States. Of particular relevance are Findings 3, 4 and 8. These Findings demonstrate the need for a flow of information on such important matters to State Members of Parliament and thus to their constituents, if the interests of the States in the federation are to be recognised and advanced.
1.6 With this in mind, and in the spirit of Recommendation 5 of its first report, the Federal-State Relations Committee wishes to express a view on the MAI from the perspective of the Parliament of Victoria. The Committee welcomes the opportunity for comment provided by the Commonwealth Joint Standing Committee on Treaties' Inquiries into the MAI.5 The Federal-State Relations Committee believes an ongoing dialogue between Parliamentary Committees to be an important element of Commonwealth-State consultation on treaty matters.
2.1 The MAI seeks to implement two basic principles of non-discrimination:
National Treatment: parties to the MAI must treat foreign investors and their investments no less favourably than they treat their own investors;6
Most-Favoured Nation Treatment: parties to the MAI must not discriminate among the investors or investments of different MAI parties.7
2.2 Along with these two principles of non-discrimination, the 14 February 1998 Negotiating Text of the MAI contains other requirements, including:
free flow of capital, profits and other investment-related payments;8
compensation for investments expropriated by government;9
rights of entry and stay for personnel who are key to an investment (eg senior management and specialised technicians).10
2.3 There is provision within the draft text for a party to lodge exceptions to the application of the MAI with respect to existing laws, or certain sectors of its economy (eg to protect domestic ownership of the media, or essential infrastructure).11 Once lodged, it will be permissible to vary an exception only if such variation would not increase the discriminatory effect of the exception.
2.4 The Federal-State Relations Committee has identified several matters which, because of their potential impact on the scope of State activity, are of particular concern to Victorian Parliamentarians. The Committee hopes that the Commonwealth will consider these concerns, and that there will be full consultation with the States on the scope and potential impact of the MAI.
3.1 The MAI Negotiating Text applies the national treatment and most favoured nation principles to investment incentives.12 It also states that
even if applied in a non-discriminatory basis, investment incentives may have distorting effects on the flow of capital and investment decisions,13
and therefore anticipates future negotiations to establish additional MAI disciplines regarding investment incentives.14
3.2 The possible impact of these provisions on State regimes of investment incentives depends in part upon the manner of application of the principles of non-discrimination, on grounds of investor nationality, to sub-federal entities. Proposed paragraph 1.4 under the heading "Subnational Measures" in the Annex to the Negotiating Text, which reads:
If a sub-federal entity of a Contracting Party accords to its own investors and their investments treatment more favourable than to investors and investments of other sub-federal entities of the same Contracting Party it shall in accordance with paragraphs 1 to 3 extend the more favourable treatment to investors of other Contracting Parties and to their investments,
would have the effect of treating each sub-federal entity as a nation in its own right, for the purposes of applying the national treatment principle. Therefore, while a State investment incentive regime that favoured local Australian investment over inter-State Australian investment would remain permissible, a regime that favoured local foreign investment over inter-State foreign investment would apparently be in breach of the MAI.
3.3 The Federal-State Relations Committee recognises that the foundation of interstate free trade in Australia is section 92 of the Constitution, which provides that
commerce and intercourse among the States, whether by means of internal carriage or ocean navigation, shall be absolutely free.
Within that Constitutional framework, the Committee would be concerned if the MAI were to undermine the present capacity of the States to foster local investment and development.
4.1 Historically, the provision and regulation of infrastructure and utilities by the States has played an important role in fostering economic growth and development in Australia.
4.2 The MAI Negotiating Text applies the principles of non-discrimination on grounds of investor nationality to privatisation, monopolies and government enterprise.15 This would have potentially serious ramifications both for the administration of, and the privatisation of, State Government Business Enterprises and for their ongoing use by the States to foster State economies.
4.3 The Commonwealth Government has expressed an intention to seek to protect certain areas, such as the media and communications, using the MAI exceptions procedure.16 The Federal-State Relations Committee feels it is important that the Commonwealth, when considering sectors of the economy which it wishes to except from the scope of the MAI, bears in mind the historical and continuing interests of the States in such areas as the provision of infrastructure and utilities.
5.1 The MAI Negotiating Text contains special provisions exempting prudential regulation of financial services from the scope of the MAI.17 In other respects, however, the principles of non-discrimination apply to foreign investment in the area of financial services.
5.2 Currently, Australia's non-bank financial institutions are regulated under an inter-State co-operative regime.18 The Federal-State Relations Committee would be concerned if the provisions of the MAI were to interfere unduly with this regime.
5.3 The Committee also believes, if Australia was to become a party to the MAI, that the provisions of the MAI dealing with financial services ought not be used by the Commonwealth, legislating under section 51 (xxix) of the Constitution (the external affairs power), as a basis for unilateral action displacing State regulation in the area of non-bank financial institutions.
6.1 The Negotiating Text of the MAI, creates a complex regime of dispute settlement, including binding international arbitration of disputes.19 These provisions would allow countries and investors who wish to challenge the conduct of parties to the MAI to have their case decided by arbitration.
6.2 The Federal-State Relations Committee is concerned that the use of international arbitration to resolve disputes under the MAI could result in a limitation of the proper commercial jurisdiction of each State's Supreme Court.
7.1 The Federal-State Relations Committee believes that the matters being considered by the Joint Standing Committee on Treaties are of utmost importance to Victorians. The Federal-State Relations Committee believes that an ongoing dialogue between Committees and an opportunity to make further presentations of Victorian concerns are crucial to a satisfactory conclusion of the Joint Standing Committee on Treaties' Inquiries.
1The OECD is an international organisation set up to advance the rate of economic growth of member countries to the highest sustainable rate, and to improve the economic and social well-being of their populations. It aims to expand world trade on a multilateral, nondiscriminatory basis. The OECD comprises 29 member nations: Australia, Austria, Belgium, Canada, The Czech Republic, Denmark, Finland, France, Germany, Greece, Hungary, Iceland, Ireland, Italy, Japan, South Korea, Luxembourg, Mexico, The Netherlands, New Zealand, Norway, Poland, Portugal, Spain, Sweden, Switzerland, Turkey, the United Kingdom, and the United States.
2Text following the heading "Accession", in Chapter XII. Final Provisions of The MAI Negotiating Text (as of 14 February 1998).
3Senator Rod Kemp, Assistant Treasurer, Potential of treaty deserves a hearing, The Age, Monday February 9th 1998.
4Treasury, Annual Report 1996-97, p 57.
5The Senate referred the MAI to the Commonwealth Parliament's Joint Standing Committee on Treaties on March 9th 1998. The Minister for Foreign Affairs, the Hon Alexander Downer MP, has also requested that the Joint Standing Committee on Treaties report on the MAI.
6Paragraph 1 under the heading "National Treatment and Most Favoured Nation Treatment", in Chapter III. Treatment of Investors and Investments of The MAI Negotiating Text (as of 14 February 1998).
7Paragraph 2 under the heading "National Treatment and Most Favoured Nation Treatment", in Chapter III. Treatment of Investors and Investments of The MAI Negotiating Text (as of 14 February 1998).
8Paragraph 4.1 under the heading "Transfers", in Chapter IV. Investment Protection of The MAI Negotiating Text (as of 14 February 1998).
9Paragraphs 2.2 and 2.3 under the heading "Expropriation and Compensation", in Chapter IV. Investment Protection of The MAI Negotiating Text (as of 14 February 1998).
10Paragraphs 1 and 2 under the heading "Temporary Entry, Stay and Work of Investors and Key Personnel", in Chapter III. Treatment of Investors and Investments of The MAI Negotiating Text (as of 14 February 1998).
11Paragraphs A and B under the heading "Lodging of Country Specific Exceptions", in Chapter IX. Country Specific Exceptions of The MAI Negotiating Text (as of 14 February 1998).
12Paragraph 1 under the heading "Investment Incentives", in Chapter III. Treatment of Investors and Investments of The MAI Negotiating Text (as of 14 February 1998).
13Paragraph 2 under the heading "Investment Incentives", in Chapter III. Treatment of Investors and Investments of The MAI Negotiating Text (as of 14 February 1998).
14Paragraph 3 under the heading "Investment Incentives", in Chapter III. Treatment of Investors and Investments of The MAI Negotiating Text (as of 14 February 1998).
15Paragraphs 1 and 3 under the heading "Privatisation" and Paragraphs A1 to A4 and B1 under the heading "Monopolies/State Enterprises/Concessions", in Chapter III. Treatment of Investors and Investments of The MAI Negotiating Text (as of 14 February 1998).
16Senator Rod Kemp, Assistant Treasurer, Potential of treaty deserves a hearing, The Age, Monday February 9th 1998.
17Paragraph 1 under the Heading "Prudential Measures" and Paragraph 2 under the Heading "Payments and Clearing Systems/Lender of Last Resort" , in Chapter VII. Financial Services of The MAI Negotiating Text (as of 14 February 1998).
18The States have established a uniform scheme for the regulation of non-bank financial institutions, based on Queensland template legislation. The uniform scheme has three elements: a uniform code, a national supervisory authority (the Australian Financial Institutions Commission, established under the Queensland Australian Financial Institutions Commission Act 1992), and a Ministerial Council on Financial Institutions, created by intergovernmental agreement, which has the power to vary the uniform scheme. The scheme is implemented in Victoria in the following way: sections 8 (1) and 9(1) of the Financial Institutions (Victoria) Act 1992 give the Financial Institutions Code established by section 30 of the Financial Institutions (Queensland) Act 1992, together with regulations in force under Part 3 of that Queensland Act, the force of law in Victoria; section 12 of the Financial Institutions (Victoria) Act 1992 confers upon the Australian Financial Institutions Commission the power to act in Victoria; and, section 56 of the Financial Institutions (Victoria) Act 1992 gives the Governor in Council the power to vary by regulation the Financial Institutions Code in force in Victoria, the regulations under Part 3 of the Financial Institutions (Queensland) Act 1992 in force in Victoria, or the powers and functions in Victoria of the Australian Financial Institutions Commission, provided that such variation has been approved by the Ministerial Council.
19Chapter V. Dispute
Settlement, paragraph A6 under the heading "Monopolies/State
Enterprises/Concessions" in Chapter III. Treatment of Investors and
Investments, paragraphs 1 to 4 under the heading "Dispute Settlement"
in Chapter VII. Financial Services and paragraph 4 in Chapter VIII. Taxation of
The MAI Negotiating Text (as of 14 February 1998).
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