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Source: The Conversation (Au and NZ) – By Jane Kelsey, Emeritus Professor of Law, University of Auckland, Waipapa Taumata Rau

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Resources Minister Shane Jones has reportedly asked officials for advice on whether oil and gas companies could be offered “bonds” as compensation if drilling rights offered by the present government were extinguished by any future administration.

Such a move would have real implications under the government’s proposed Fast-track Approvals Bill, which is designed to “enable faster approval of infrastructure and other projects that have significant regional or national benefits”.

NZ First’s Jones is one of three ministers who could have sign-off powers under the new law. Offering investors protection against future liability may be seen as one way to attract such projects.

But some of those investors may already have the means of securing compensation and deterring government interference under existing “investor-state dispute settlement” (ISDS) mechanisms.

This is despite efforts by recent governments – including coalition partner NZ First – to close that door. The potential fiscal and political risk adds one more reason not to proceed with the fast-track bill.

Shane Jones in parliament
NZ First’s Shane Jones: seeking advice on compensation for investors.
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A chilling effect on governments

Investor-state dispute settlement provisions have been included in bilateral investment treaties, and some investment chapters in free trade agreements (FTAs), for several decades.

These agreements confer special protections on foreign investors against laws, policies, decisions and other actions and omissions that – contrary to their “legitimate expectations” at the time of investing – adversely affect the value or profitability of their investments.

The foreign investor can directly enforce those guarantees against the host state in ad hoc international tribunals. These have been widely criticised as favouring investors, lacking precedents and appeals, and for conflicts of interests when the arbitrators may be advocates for investors in other disputes.

Most agreements do not permit considerations of fault, even for environmental damage or human rights violations. Nor do they protect a democratically elected government’s mandate to amend the law.

The tribunal can award billions of dollars in compensation for lost future profits, with compound interest, even where the investor made a minimal outlay.

‘Treaty shopping’

The goal is to “chill” governments from pursuing the actions investors want to stop. Cases are increasingly bankrolled by third party funders willing to speculate on the outcome, so the investor has no risk in bringing a dispute.

Fighting a dispute can cost many millions, even if the state eventually wins. Yet the very existence of an ISDS dispute can be kept secret.

In theory, only investors from states which are party to these trade or investment agreements can sue. But “treaty-shopping” has seen investors use ISDS against their own governments.

In 2019, for example, Australian mining magnate Clive Palmer announced he had moved ownership of his flagship company to Singapore, having briefly shifted it to New Zealand first. The purpose was to take advantage of ISDS in the ASEAN-Australia-New Zealand FTA, and the Singapore-Australia FTA.

Palmer now has three claims totalling around US$300 billion against his own government, including for matters he has litigated on and lost in the Australian courts.

Investor disputes and climate change

The bulk of ISDS cases involve natural resources and, increasingly, climate change measures. As of 2022, investors in the fossil fuel sector had brought at least 192 known ISDS cases against governments. The past decade has seen more than 80 known cases brought by investors in the renewable energy sector.

Last year, the UN Special Rapporteur on Human Rights and the Environment warned that governments could be liable to oil and gas corporations for US$340 billion in future disputes over fulfilling their commitments under the Paris Agreement on climate change.

This is a major disincentive to ambitious climate action. States that once championed agreements containing ISDS are now withdrawing from them. This year, the European Commission proposed a coordinated EU withdrawal from the multilateral Energy Charter Treaty because energy companies are using ISDS to challenge new climate change laws and policies.

The New Zealand parliament began to step back from ISDS in 2015, when
NZ First MP Fletcher Tabuteau sponsored a private member’s bill “to protect New Zealand laws by prohibiting New Zealand from entering international agreements that include provision for investor-state dispute settlement”.

The Fighting Foreign Corporate Control Bill was defeated by a single vote (Labour, the Greens and NZ First for; National, ACT and United Future against). But in 2017, the Labour-NZ First coalition adopted a policy of no ISDS in future trade agreements.

One National MP predicted the earlier NZ First bill “would make it very difficult to enter into new trade deals and negate current trade deals which would be disastrous for the economy”. But subsequent FTAs, including with the UK and EU, have been concluded without ISDS.

Fiscal and democratic risk

However, a number of New Zealand’s other FTAs still allow ISDS claims to be initiated by investors legally located in partner countries: China, Japan, Canada, Singapore, Indonesia, Philippines, Malaysia, Mexico, South Korea and Brunei, among others.

This raises the stakes of the Fast-track Approvals Bill, including for Māori. The Waitangi Tribunal inquiry into the Trans-Pacific Partnership Agreement expressed concern that the potential for ISDS disputes might deter the Crown from meeting its te Tiriti/Treaty obligations if doing so affected investors.

The Tribunal was also uncertain if the Treaty of Waitangi exception included in free trade agreements would provide protection against such claims.

The existence of ISDS might suit the proponents and beneficiaries of the fast-track legislation. But the government must also be aware it carries fiscal risks that could run into the billions.

Foreign investors wanting to protect their gains under the controversial new law could hold the country to ransom by threatening a dispute. As a result, they would constrain New Zealand’s democratic ability to exercise its sovereignty, and to protect te Tiriti rights.

The Conversation

Jane Kelsey received a Marsden Grant that included research on investment agreement, has advised governments in NZ and internationally on withdrawal from ISDS, has participated in UNCITRAL Working Group III on reform of ISDS, and gave expert evidence to the Waitangi Tribunal on ISDS

ref. How the fast-track law could expose future NZ governments to expensive trade disputes –