THE US PROPOSED ANNEX ON STATE-OWNED ENTERPRISES FOR TISA,

dated 6 October 20151

A snapshot of the TISA annex

The TISA Annex is modelled on the US-driven chapter on State-owned Enterprises (SOEs)
in the Trans-Pacific Partnership Agreement (TPPA), concluded on 4 October 2015.
An SOE must operate like a private business, using purely commercial considerations
when it buys and sells services or when it buys goods if it is a services SOE.
The SOE doesnt have to apply purely commercial considerations where it has a public
mandate to deliver a service, but it still cant give preferences to local services and
suppliers.
Any administrative body that regulates an SOE must exercise its regulatory discretion
impartially in relation to all the entities it regulates.
If one TISA party thinks that 30 of the largest 100 companies in another TISA member is
an SOE, or its SOEs contribute 30% of that countrys overall GDP, it can demand the TISA
parties develop further rules that aim to ensure it does not provide non-commercial
assistance (financial support or through goods and services) that cause adverse effects
to another Partys interests. That rule would not apply to domestic services supplied by
an SOE, but would apply to its activities that provide services across the border, which
are commonly intertwined.
The same obligation would be triggered if a country with that proportion of SOEs (such
as China or India) wanted to join TISA.
In addition to the general transparency obligations in TISA a government must provide
specific information requested about a SOE (although this does not go as far as the
requirements in TPPA).

The TPPA: the precedent for TISA, TTIP and WTO

On 6 October 2015 the US proposed an Annex on SOEs for the Trade in Services Agreement
(TISA) - two days after the 12 parties to the Trans-Pacific Partnership Agreement (TPPA),
including the US, concluded their negotiations. The TPPA contains a unique Chapter 17 that
imposes unprecedented restrictions on SOEs and gives the parties to the TPPA rights to
demand information on other parties SOEs and to challenge aspects of their operations.

When the TPPA negotiations began in 2010 the US made it clear that it required a chapter
on SOEs. The goal was always to create precedent-setting rules that could target China,
although the US also had other countries SOEs in its sights the state-managed Vietnamese
economy, various countries sovereign wealth funds, and once Japan joined, Japan Posts
banking, insurance and delivery services. All the other countries were reluctant to concede
the need for such a chapter and the talks went around in circles for several years. Eventually
the US had its way.
1 Professor Jane Kelsey, Faculty of Law, The University of Auckland, April 2016

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The US proposal for TISA adopts and adapts key parts of the TPPA chapter that force
majority owned SOEs to operate like private sector businesses. The most extreme,
complicated and potentially unworkable provisions in the TPPA relating to state support are
not included yet. But there is an extraordinary power for a single TISA party to require the
development of those rules if another TISA country, or a country seeking to join TISA, has too
many large SOEs.2 China is the real target of the USs disciplines on SOEs in both TISA and
the TPPA, along with any other countries that have a strong presence of state companies in
their economy. As President Obama said of the TPPA in October 2015, these agreements are
about the US making the rules for the global economy in the 21 st century, not China, in ways
that reflect Americas values. 3

Why target SOEs?

Since the neoliberal era began in the 1970s, public services have been progressively
commercialised and corporatised. Corporatisation was a core part of the Washington
Consensus agenda foisted on poorer countries by the World Bank, its regional offshoots and
the IMF. Former socialist countries in Eastern Europe converted large parts of their states
activities into SOEs as part of the transition to market economies. Vanguard governments in
Chile, Britain, New Zealand and Australia led the charge in the more affluent world, opening
the door for corporations and financial investors to the lucrative public sphere and
promoting the model through the OECD. 4

This shift has allowed governments to shed their social, employment, and economic
development responsibilities; justified reducing government subsidies and other supports;
shifted workers in the public sector onto private sector employment conditions and
drastically cut the workforce; created new markets for private businesses; and prepared
SOEs for the next step of privatisation. The secretly negotiated TPPA and now TISA provide
new vehicles to advance this agenda.

In recent years, challenges to SOEs have also assumed a geopolitical dimension, which is
driving the US determination to get disciplines on SOEs into binding and enforceable trade
agreements. State-managed economies, especially China, where state-owned and state-
supported enterprises play a dominant role, threaten the ascendancy of market-based
economies and their private sector interests. US corporations and unions claim they face
unfair competition in those state-managed economies, inside the US, and in third countries
where both compete. 5

The privatisation agenda

2 TISA Article X.7

3 Statement by the President on the Trans-Pacific Partnership, 5 October 2015
https://www.whitehouse.gov/the-press-office/2015/10/05/statement-president-trans-pacific-partnership
4 eg. OECD, Privatising State-owned Enterprises. An overview of policies and practices in OECD countries, OECD,
2003.
5 For an early analysis of the thinking behind the TPPA SOE chapter see: Jane Kelsey, The Risks of Disciplines
on State-owned Enterprises in the Proposed Trans-Pacific partnership Agreement, 4 March 2012,
http://www.itsourfuture.org.nz/wp-content/uploads/2013/09/Kelsey-TPP-SOE-paper.pdf

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There is no reference to privatisation in the TISA Annex (in contrast to the Singapore US FTA
which required only Singapore to privatise 6). Nor is that the inevitable outcome. But the
more fully commercial a SOE is required to be, the less rationale there is for it to remain
state-owned, aside from providing a revenue stream for the government.

Corporatisation is promoted in the name of improving efficiencies, especially by introducing

competition. Once a public entity is corporatised, the rationale for it remaining public is
undermined. Partial privatisation is presented as a benign way to bring in new equity or pay
down corporate or public debt, while maintaining public control. Selling a minority stake
creates investor demand and dilutes political resistance to full privatisation down the track.

Paradoxically, states have had to come to the rescue of systematically important former SOEs
when privatised businesses fail, often through profit or asset stripping, or market or social
failures create unacceptable costs. Examples include banks, airlines, railways, water and
other utilities. During the global financial crisis, the US became the owner not only of banks
and insurers, but the (then) worlds largest automobile manufacturer. The situation of
economic crisis has special temporary protection in the TISA (and TPPA) texts, but not where
an individual enterprise fails.

The SOE landscape

Many public services now take a corporate form, whether they are publicly listed, non-listed
or statutory corporations. They span many sectors: broadcasting, postal services, tourism,
ports, rail and land transport, electricity and gas, telecommunications, water and sanitation,
research and development, banks and insurers, health care, sports and cultural facilities
(museums or archives), forestry and farming, mining, and manufacturing. 7 The network
industries (utilities and post) make up about half the total value of the SOE sector in OECD
countries and 60% of employment; next comes finance, at about a quarter of total SOEs by
value, followed by transportation and the primary sector, including mining.

The impacts of SOE rules in each country will depend on their number, size, workforce and
strategic importance. This varies widely across countries involved in TISA. OECD data for the
end of 2012 shows Hungary with 371 SOEs and Poland with 326, the Czech Republic and
Lithuania with more than 100, Germany, Mexico, Portugal and Latvia have around 70, a
significant number of countries with around 50 (Canada, Finland, Estonia, France, Greece,
South Korea, Norway, Spain, Sweden and Turkey), Chile, Slovenia and Israel are in the 30s,
while the US, UK, New Zealand, Switzerland, Australia, Austria, Belgium, Denmark, and Italy
have relatively few. 8

An OECD report in 2014 set out each OECD countrys majority owned listed SOEs, which
gives some indication of entities that are potentially affected by the TISA Annex. 9 Minority

6 Singapore US FTA Article 12.3.2(f): Singapore must continue reducing, with a goal of substantially
eliminating, its aggregate ownership and other interests that confer effective influence in entities organized
under the laws of Singapore.
7 OECD, The Size and Sectoral Distribution of SOEs in OECD and Partner Countries, 2014, page 15, Table 2.
8 OECD, 2014, Table 1 summarises for OCED countries the number and value of SOEs as of end 2012.
9 OECD, 2014, page 18-21, Table 3,

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holdings (which are not covered by the Annex) are most common in manufacturing, finance,
telecoms and transportation. 10

How SOEs are defined for the TISA Annex

The USs TISA Annex applies to

a juridical person 11
at central government level
in which the state:
- directly owns more than 50% of the share capital; or
- controls, through ownership interests, the exercise of more than 50% of voting rights;
or
- holds the power to appoint a majority of the board of directors or equivalent
management body; and
is principally engaged in commercial activities, which are defined as activities
undertaken with an orientation towards profit-making and result in production of a
good or supply of a service that is sold to a consumer in quantities and at a price that the
SOE determines.

Minority state-owned entities are not covered by the Annex, even if the state has by far the
largest shareholding. Whether the states holding of special voting rights on some matters,
such as a golden share, would count as more than 50% of voting rights is unclear, but
certainly arguable, so those SOEs need to be included in any analysis.

The TPPA had a threshold of annual revenue below which most SOE rules would not apply. 12
There is no such threshold in the US annex proposed for TISA.

The criterion of orientation towards profit-making is opaque. The word orientation

suggests there may be other competing objectives. A footnote 13 helpfully says orientation
towards profit-making does not include an enterprise that operates on a not-for-profit or on
a cost-recovery basis.14 But this refers to the entire enterprise, not certain activities. Even if it
arguably applies to an SOE which has a mix of profit and non-profit activities, it is impossible
to predict where the threshold lies.

10 OECD, 2014, page 16, Figure 4.

11The term used in the TPPA is enterprise, but that is so broadly defined that it does not seem to make much
difference. (TPPA Article 1.3: any entity constituted or organized under applicable law, whether or not for
profit, and whether privately or governmentally owned or controlled, including any corporation, trust,
partnership, sole proprietorship, joint venture, association, or similar organization.)
12 Those SOEs must still comply with the states obligations under the rest of the TPPA when exercising a
delegated authority.
13 TISA footnote 1.
14 This clarification of the meaning of commercial activities could provide some more certainty for the
meaning of the standard exception (found in GATS Article 1.3) for services supplied in the exercise of
governmental authority, which are defined in terms of services that are neither commercial nor supplied in
competition. Conversely, failure to add a similar footnote where that phrase occurs in TISA could raise
unhelpful arguments about different meanings in different contexts, especially as this refers to commercial
activities and the other to supply of a service.

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The definition of profit-making could also cover an SOE that retains, or is required to retain,
earnings to cover depreciation, maintain surpluses as a buffer against future downturns,
make prudent provision for future investment, or in anticipation of reductions in future
government funding. Nor does the SOE need to actually make a profit, provided it aims to do
so the kind of enterprise where the government might step in with assistance at times to
prevent its collapse and in preference to privatisation.

What is not covered

The US TISA proposal only applies to SOEs at central government level. This was a
controversial issue in the TPPA, 15 where each party designated which, if any, rules would
apply to the sub-central government level. 16 As a result, the US and other federal
jurisdictions whose states or provinces own SOEs have less exposure than countries with a
unitary system of government.

The TISA annex has a number of other specific exclusions:

Regulatory and supervisory roles, and monetary and exchange rate policies of the central
bank, actions of financial regulatory bodies, and activities taken for resolution of failed
financial institutions and financial service suppliers are protected. 17

Independent pension funds are excluded if they meet strict criteria. However, they are
not excluded if the government directs the funds investment, for example requiring
ethical investments or a boycott of a specific country or product. 18

Sovereign wealth funds, or any wholly owned subsidiary, are protected it if are solely
special purpose investment funds and the country has adopted the Santiago Principles. 19
However, there is no exception for commercial subsidiaries of sovereign wealth funds if
they do not qualify as SOEs themselves.

Temporary responses to a national or global economic emergency. 20

Presumably the limited general exception drawn from the GATS Article XIV would also apply.

Article X.2.4 may mislead people into thinking that government procurement is also
excluded. The TISA definition of government procurement follows the very limited GATS

15 The US has constitutional barriers to applying such rules to state governments.

16 TPPA Annex 17-D. Negotiations to extend the chapter to sub-central government are slated to begin five
years after the Agreement comes into force, see Article 17.14 and Annex 17-C.
17 TISA Article X.2.2
18 To be excluded they must exclusively engage in specified activities that are solely for the benefit of
contributors to the plan and their beneficiaries, a fiduciary duty must be owed to those beneficiaries, and the
government cannot influence its investments.
19 International Working Group of Sovereign Wealth Funds Generally Accepted Principles and Practices 2008,
TISA Article X.2.3
20 TISA Article X.4.3

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definition:21 laws, regulations or requirements governing the procurement by governmental
agencies of services purchased for governmental purposes and not with a view to
commercial resale or with a view to use in the supply of services for commercial sale.
Indeed, one of the core rules in the TISA annex (Article X.4: Non-discriminatory Treatment
and Commercial Considerations) explicitly targets the buying and selling of services to and
by SOEs.

Article X.5 of the TISA proposal seems to envisage a SOE-specific annex of non-conforming
activities. This refers to activities, not to SOEs. The Annex is a negative list, meaning only
those explicitly activities listed will be protected into the future. Most countries annexes in
the TPPA applied a countrys reservation for certain activities or measures to all SOEs, and
in some cases to all existing and future SOEs. 22 However, each countrys annex was very
aggressively negotiated by the US, as it would be for TISA.

The reference to future SOEs in these non-conforming measures highlights a major

problem of future-proofing. New SOEs may need to be created because of market, policy,
social or regulatory failure, or because a government rejects the neoliberal model for some
or all such activities. In most instances where new SOEs are created they need special
support, at least initially, and may need to adopt measures that favour local services firms or
other non-commercial practices to meet their objectives. There is no provision for this kind
of future-proofing in the Annex (and only limited in the TPPA 23).

Some developing countries (notably Viet Nam, Malaysia and Brunei Darussalam) secured
transition periods for certain rules in the TPPA. There is no indication that would be allowed
in TISA.

Impartial exercise of regulatory discretion

Under Article X.3 any administrative body that regulates a SOE must exercise its regulatory
discretion impartially in relation to all the entities it regulates, including any non-SOEs.
Discretion is intrinsically subjective and open to challenge. This provision overlaps with some
of the disciplines on domestic regulation, and may be designed to eliminate arguments
about whether the domestic regulation disciplines apply to decisions affecting SOEs.

Apply private sector principles when buying and selling services

An SOE must apply the same commercial considerations to buying or selling services as a
private sector entity would when it engages in commercial activities (activities oriented
towards a profit and selling services to consumers at a quantity and price the SOE decides). 24

21 The leaked TISA Government Procurement text from 1 July 2015 notes the equivalent definition in GATS
Article XIII will be inserted into the TISA text.
22 Under TPPA Article 17.9
23 Initial capitalization of an SOE or acquisition of a controlling interest in an enterprise that principally
supplies services within the national territory is protected from the rule preventing non-commercial assistance
to SOEs. TISA Article 17.7.6
24 TISA Article X.4

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Examples of commercial considerations are matters of price, quality, demand and supply,
transportation, and marketability.

The same commercial considerations must apply if an SOE sells goods to a service supplier of
a TISA party (a backdoor way to get rules on goods into TISA).

The SOE is allowed to apply non-commercial considerations (such as the need for public
access, affordability, cultural sensitivities) where it is fulfilling a public service mandate. A
public service mandate is defined as a government mandate under which an SOE makes a
service available to the public directly or indirectly, and includes the distribution of goods
and the supply of general infrastructure services. 25 But even where that mandate exists the
SOE must not discriminate against services and service suppliers from other TISA countries.
An important example would be a state broadcaster that is required to operate on a profit-
oriented basis, which has a public service mandate but cannot give preference to buying
local audio-visual services and products.

Non-discrimination when an SOE buys and sells services

In addition to only using commercial criteria, an SOE must not discriminate against other
TISA countries when buying or selling services, or when an SOE sells goods to a service
supplier of a TISA country. 26 So no buy local, unless doing so is based on commercial
considerations.27

There is one saving provision that reflects the US experience with the global financial crisis: a
party can adopt or enforce measures to respond temporarily to a national or global
economic emergency, and the SOE which that action applies to is protected from the rules
temporarily. The TISA version preserves more room for governments than was agreed to in
TPPA, which limited the SOEs protection to the (contestable) duration of the emergency. 28

Onerous Transparency Obligations

Every party to TISA would have to provide or publish on a website a list of all its SOEs within
6 months of the agreement coming into force and regularly update it. 29 With no minimum
threshold that task could be onerous for countries that have many SOEs.

There is another more burdensome transparency obligation, again drawn from the TPPA. 30
Each party must respond to a request for information relating to a particular SOE, 31 including
the percentage of the states share ownership and voting power; any special shares or voting
power (such as a golden share); government titles of any directors or officers of the SOE;

25 TISA footnote 4
26TISA Article X.4
27 TISA X.4.2
28 TISA X.4.3
29 TISA Article X.6
30 TPPA Article 17.10
31 TISA Article X.6.2

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annual revenue and total assets for the most recent 3 years; any exemptions and immunities
conferred under the law that benefit the SOE; and other publicly available information.

All the TISA party has to do is include in its request an explanation of how the activities [of
that SOE] may be affecting trade in services between the parties. That vague requirement is
not subject to any independent vetting and the recipient country cannot challenge that
assessment. It must provide the information requested. There is no limit on how many SOEs
a country can be required to provide this information for or how often repeated requests
can be made. The recipient cannot even refuse to disclose information to a government with
whose private and/or state enterprises it competes on the grounds of confidentiality. It can
only indicate that certain information is confidential and should not be shared beyond the
requesting state. The potential for harassment and commercial prejudice is significant. The
only protection for the target state is that this obligation only applies to SOEs as defined in
the annex.

SOE compliance with the rest of TISA

Whether a states obligations under a treaty apply to its SOEs is not settled at international
law.32 The TPPA explicitly requires an SOE to comply with its home governments obligations
across the whole agreement when it is carrying out a delegated regulatory, administrative or
other authority.33 A footnote gives examples of what this might involve: licensing, setting
fees or charges, allocating quotas, or powers to expropriate. 34 There is no equivalent in the
TISA annex. That may be because the US thinks this is covered in the domestic regulation
annex or elsewhere in TISA.

The USs anti-China bullet

The ultimate goal of the USs SOE proposal is revealed in the extraordinary final provision.
Article X.7: Future Negotiations targets existing parties to the TISA and any country seeking
to accede. Any country considering accession to TISA and which has a large number of SOEs
must be prepared to live with additional, highly aggressive rules that could result in repeated
and protracted challenges to the core of its domestic economy and offshore operations. In
other words, it seems designed to ensure that China never accedes to TISA.

Article X.7.1 and 3 would give a single TISA party the ability to trigger negotiations that
require agreement on a further set of disciplines on SOEs that are already in the TPPA but
not in the TISA proposal. Obviously, the US is positioning itself for this role.

This provision is not targeted at individual SOEs, but at a countrys system of SOEs. Where a
party (the US) considers that SOEs play a dominant role in the market of another TISA party

32 Draft articles on Responsibility of States for Internationally Wrongful Acts, adopted by the
International Law Commission (ILC) at its fifty-third session in 2001 and submitted to the General Assembly as
part of the Commissions report covering the work of that session (A/56/10), remain a proposal and states have
repeatedly declined to formalise this into a treaty.
33 TPPA Article 17.3
34 TPPA Chapter 17 footnote 12.

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or a country wanting to accede it can notify that belief to all the TISA parties, accompanied
by statistical data and other evidence.

Dominance is judged by two measures: either 30 of the 100 largest legal entities in the
country, measured by market value, are SOEs (as defined by the Annex) or the cumulative
market value of all SOEs in the country represents more than 30% of the countrys gross
national income. The threshold seems arbitrary, but is presumably based on US calculations
about which countries would be caught. That data and evidence is not subject to any
independent scrutiny. Nor does the target country have any right to contest or respond
before the rest of the provision kicks in.

The criteria are very problematic, as they assume there are accurate statistics in or about the
country concerned, unless the complaining country is to be allowed to substitute its own
calculations. The OECD itself says calculating the absolute size of SOE sectors is notoriously
difficult, and suggests the best measures of the weight of SOEs in an economy is based on
employees or their contribution to value-added. 35

Once the allegation has been notified, the TISA parties must develop new rules on the
provision of non-commercial assistance to a SOE, which must at a minimum aim to ensure
that such assistance does not cause adverse effects to another Partys interests, and that
any policies and programmes that provide such assistance are transparent. Before those
rules are developed, a Party can seek consultations with a view to reaching an agreed
resolution.

None of the crucial terms is defined in the TISA annex. However, these same concepts are
used in the TPPA.36 Non-commercial assistance is defined in the TPPA through two forms of
assistance to an SOE:

direct transfers of funds, or potential transfers of funds and liabilities, through grants
or debt forgiveness, loans, guarantees or other financing on better than market
terms, or equity capital injections that are inconsistent with usual investment
practice of private investors; or

provision of goods or services other than general infrastructure on terms that are
more favourable than those that would be commercially available to the SOE. 37

The assistance must be attributable to the state-owned status of the enterprise. That can be
demonstrated by various means: the assistance is specifically limited to the countrys SOEs
or predominantly used by the SOEs, or a disproportionately large part of the assistance is
provided to the SOEs, or the government uses its discretion to provide the assistance in ways
that favour its SOEs.

35 OECD, 2014, page 11

36 TPPA Articles 17.6 to 17.8
37 TPPA Article 17.1 Definitions

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The potential impact of this provision on services SOEs was so controversial in the TPPA that
the rule does not apply to the supply of a service within the country; 38 it only applies to the
supply of a service by an SOE into another TPPA country, either across the border (eg by
Internet or visiting personnel) or through a covered investment. 39 However, an SOEs
domestic and cross-border operations are often institutionally inseparable. As noted above,
there is some limited protection for initial capitalisation of an SOE and acquisition of a
controlling interest in an entity that principally supplies services within the territory. 40

The TPPA provision is the most problematic and potentially unworkable part of the SOE
chapter in a technical sense. Most SOEs that engage wholly or partly in providing services
transport, broadcasting, banking, research and development span domestic and non-
domestic borders. Efficiency and practicality require that they do so through integrated
operations. It will be exceptionally difficult to separate out the purely domestic services
elements that are excluded from the rule.

There is a further complication that the TPPA test compares like services. Comparing like
goods has proved hard enough in trade law. The likeness test for services is largely
untested, and very unpredictable because, for many kinds of services, there are too many
possible factors that would allow one service to be distinguished from another.

Further, the test for the adverse effects of the non-commercial assistance borrows from the
problematic adverse effects test in the WTO Agreement on Subsidies and Countervailing
Measures. The TPPA then applies this to services, which are notoriously unquantifiable in
any accurate sense, and assumes that the impact of the assistance given to an SOE can be
separated from other factors that may have affected the market. A footnote in the TPPA text
implicitly acknowledges the problem, saying it must be shown that the adverse effects have
been caused by the non-commercial assistance within the context of other possible causal
factors to ensure an appropriate attribution of causality. 41

Remembering that the TPPA rules only applies to the services operations of the SOE in
another TPPA country, the adverse effects of an advantage arises if the advantage:

displaces or impedes a like service in another TPPA country, judged over at least a
year; or

significantly undercuts the price of a service compared with the price of a like
service supplied by a service supplier of another TPPA country. 42

The US clearly wants those disciplines in the TISA, but may have been nervous that to
promote them as part of the initial package would risk seeing the entire Annex rejected as
38 TPPA Article 17.6.4
39 TPPA Article 17.6.1(b) and (c)
40 TPPA Article 17.7.6
41 TPPA Chapter 17, fn 17.
42 TPPA Article 17.7.4: Comparisons of the prices shall be made at the same level of trade and at
comparable times, and due account shall be taken for factors affecting price comparability. If a direct
comparison of transactions is not possible, the existence of price undercutting may be demonstrated on some
other reasonable basis, such as, in the case of goods, a comparison of unit values.

10
too extreme. In the meantime, the mere threat of developing such disciplines seems to be
designed to provide strategic messaging to potential parties to TISA to adopt the US model
or stay out of the club.

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