Since the world’s first bilateral investment treaty (BIT) was signed between Germany and Pakistan in 1959, more than 3,000 BITs have been concluded between various countries, and the number is increasing. A BIT is an agreement concluded between one country (the “host” state) and another country (the “home” state) to provide benefits and investment protection for the home state in the host. Traditionally, BITs have been concluded between developing and developed countries, but the trend has changed in recent decades in that more BITs are being concluded among developing countries.

While the number of BITs is increasing, so is the controversy surrounding them. Critics view BITs as restrictions on the policy space of a host state in favour of foreign investors. While more African countries are entering into BITs with both African countries and those from other regions, the controversy has raised the question of whether African countries should “BIT” or not. South Africa, like some South American developing countries, has adopted an approach in favour of investment regulation though domestic laws instead of through BITs. This paper discusses BITs and the controversies they raise, analyses the trends of African BITs, and explores South Africa’s approach to BITs. Finally, it assesses whether African countries should conclude BITs or not.

BITs in a nutshell

The rationale behind BITs is underpinned by industries in developed countries traditionally seeking to set up their manufacturing, extractive and other operations in less developed regions of the world, which traditionally offer lower labour costs and cheaper raw materials. Despite these advantages, investors doing business in such regions have to deal with legal uncertainty, the threat of expropriation and very high general transaction costs. For investors, BITs are a mechanism to mitigate risks that may arise from state interference with an investment. In the past, when disputes arose, such as those relating to expropriation, investors relied mainly on diplomatic protection. Today, BITs are the main tool to protect investors, provide them with rights and benefits, and deal with investment disputes. They provide a cushion against regulatory uncertainty and discriminatory treatment.

Even though the actual benefits and protection that a BIT provides varies according to its terms, BITs share six core provisions: 1) protection from expropriation or nationalisation, 2) most favoured nation treatment, which entails treatment no less favourable than that accorded to other foreign investors in like circumstances, 3) national treatment, being treatment no less favourable in similar circumstances compared to treatment of nationals of the home state, 4) repatriation and investment of earnings, 5) observation of contractual obligations, and 6) dispute resolution.⁽²⁾ Thus, BITs are aimed at attracting investors to even the most uncertain or difficult environments. Within the developing and least developed country context, expropriation is one of the most contentious issues in light of nationalisation and various land reform initiatives taking place in many countries. BITs do not protect against expropriation in general; they protect only against unlawful expropriation, whether direct or indirect. For expropriation to be lawful, it should meet four requirements: the expropriation must have a public purpose, be done in a non-discriminatory manner, be subject to compensation and follow due process. Investors are protected from discriminatory treatment through the guarantee of most favoured nation treatment and national treatment.

The controversy surrounding BITs

BITs have created a situation in which investors can bring claims against host states if such claims fall under the ambit of BITs.⁽³⁾ A growing number of investment arbitration proceedings and a spate of large financial penalties against various host countries have thrust BITs and their dispute settlement system into the spotlight.

The International Centre for the Settlement of Investment Disputes (ICSID), which falls under the ambit of the World Bank, is one of the preferred dispute settlement forums. Half of all disputes initiated at the ICSID involve African countries.⁽⁴⁾ As the increase in BITs worldwide correlates with an increase in investment dispute proceedings, the more BITs African countries enter into, the more they will be parties in dispute settlement proceedings. The key issue raised by critics of BITs has been the perceived preference of corporate rights over public interest. African countries may balk at their policy sovereignty being encroached on as they may be prevented from implementing legal reforms without the threat of dispute settlement proceedings. As such, BITs should be signed with knowledge of their implications at the time of negotiation and not just when arbitration proceedings are instituted.

Furthermore, the entire dispute settlement mechanism in BITs has been criticised as unpredictable and open to bias. Arbitrators have been found to lack the safeguards that apply to judges of both domestic and international courts, including security of tenure and prohibitions on getting paid for non-judicial activities.⁽⁵⁾ Furthermore, the issue of how blind justice is in investment arbitration is questionable: since mainly investors bring claims under BITs, arbitrators may be suspected of deciding cases in favour of investors in order to encourage claims and expand their market.⁽⁶⁾ However, such allegations should be verified on a case-by-case basis.

BITs in the African context

Doing business in Africa has many advantages but there are also many challenges that have necessitated the conclusion of BITs to encourage investors to invest confidently in the continent. Many African countries have acquired a reputation for weak adherence to rule of law.⁽⁷⁾ In addition, investor protection in Africa is reportedly lower than in other regions in the world.⁽⁸⁾ One of the key issues faced in some African countries is the enforcement of contracts. In this regard, the Organisation for Economic Cooperation and Development (OECD) has found that the cost of enforcement of a contract in Africa is nearly 50% of the underlying value of the investment while it takes an average of two years to enforce a contract.⁽⁹⁾ Furthermore, corruption is higher than in other regions, with Transparency International estimating corruption in Africa to be nearly three times higher than an average OECD country and twice as high as one in Asia.⁽¹⁰⁾ These challenges have made the continent both risky and costly to do business in.

With more investors eyeing African countries as an investment and business destination, the number of BITs is increasing. African countries have concluded more than 400 BITs with developed countries to protect investors from uncertain business environments.⁽¹¹⁾ Egypt has entered into more than 100 BITs with developed and developing countries, while Nigeria – Africa’s largest economy – has entered into more than 20 BITs.⁽¹²⁾ African countries are also trading and investing more within the continent; this has caused a wave of BITs between African countries. For instance, over the past 14 years, Mauritius has signed or ratified BITs with 17 African countries.⁽¹³⁾

African countries are entering into BITs for a number of reasons, the primary one being the attraction of foreign direct investment (FDI). FDI provides financing that would otherwise be unavailable to many African countries.⁽¹⁴⁾ Such funds have the potential to stimulate economic development. However, there are mixed views on whether BITs will result in increased FDI flows to developing countries.⁽¹⁵⁾ On the one hand, some studies find that BITs have a robust positive impact on promoting FDI flows to developing countries. On the other hand, several studies find little or no relationship between BITs and FDI.⁽¹⁶⁾ For African countries, the effective use of BITs as a development tool depends on how the BIT is actually drafted. In this regard, BITs must account for and be tailored to individual country circumstances and needs.⁽¹⁷⁾

Despite varying views on the relationship between BITs and FDI, BITs have had some form of economic impact on the continent. Figure 1 below demonstrates this impact by comparing the proportion of gross domestic product (GDP) of Sub Saharan Africa covered by BITs with select developing countries. The graph reveals that BITs with Western European countries dominate GDP figures in the region. Further, Asian BITs with Asian countries also play a substantial role in GDP figures. Figure 2 below shows African FDI flows before and after entering into BITs with select countries. The graph shows that FDI invested by countries such as the UK and the Netherlands increased after BITs were entered into. Although there may be other contributory factors that have influenced these increases, entering into BITs does play a role. The extent of the role that BITs play differs from one country to the other.

Figure 1: Percentage of Sub-Saharan Africa GDP covered by BITs (select countries) ⁽¹⁸⁾

Figure 2: FDI stock before BIT implementation and current levels (select countries) ⁽¹⁹⁾

African countries have been viewed as having rushed into signing BITs with developing countries. In this respect, Mahnaz Malik, an investment arbitration lawyer at the chambers of Arthur Marriott QC in London, believes that the majority of BITs reflect texts developed to promote anti-communist, post-decolonisation protection agendas of the 1960s.⁽²⁰⁾ Although the extent to which this view is accurate differs from BIT to BIT, there has indeed been a need to shift from old-style BITs signed shortly after the wave of independence of African countries. Two approaches can be adopted by African countries not content with the old generation of BITs signed previously. First, they can sign “new generation” BITs that better reflect their development and investment needs, such as that adopted by Benin. Second, a more drastic approach involves scrapping BITs completely. This shift in BIT treaty formation requires African countries to better articulate their individual needs in BITs and negotiate such agreements from a position of strength. Some of the provisions which some African countries may want to include in their BITs are developmental issues, human rights concerns and provisions for the protection of the environment. The inclusion of such provisions may be viewed as a mechanism to balance out BITs by also providing obligations for investors. When negotiating BITs, African countries should be cautious that the agreements contain wording with a legal effect. By way of illustration, the recent Benin/Canada BIT on the face of it goes a step further than general BITs by including provisions relating to corporate social responsibility.⁽²¹⁾ However, the reality is that should a dispute arise, the obligation of corporate social responsibility may be found non-mandatory due to the language used, which merely requires the contracting parties to “encourage enterprises operating within its territory or subject to its jurisdiction to voluntarily incorporate internationally recognised standards of corporate social responsibility in their practices and internal policies.” In this instance, what seems to be a step forward, may actually be unenforceable in practice.⁽²²⁾

New approaches to investment regulation: The case of South Africa

Unlike most African countries, South Africa has taken a very different approach to BITs. It has terminated and provided notice for the termination of its BITs with various countries, such as Spain, the Netherlands and Germany, and after a review of its investment regulation system, has proposed a Promotion and Protection of Investment Bill of 2013. South Africa is not the only country to terminate its BITs. Some South American countries, such as Bolivia, Ecuador and Venezuela, have gone as far as withdrawing from ICSID.⁽²³⁾ The decision to review South Africa’s BITs is not completely unusual as other countries, including the US and Canada, have revised their model BITs.⁽²⁴⁾

As part of the review process, the South African Department of Trade and Industry was mandated to review and strengthen the country’s investment regime in order to open the country up to foreign direct investment, while still maintaining the sovereign right to pursue policy objectives. After 1994, South Africa concluded 30 BITs with various countries to attract private investment.⁽²⁵⁾ However, the agreements were criticised as having been hastily entered into as a quick way to attract investment after apartheid since BITS were seen as a quick way to stimulate foreign investment.⁽²⁶⁾ Problems arose with the implementation of Black Economic Empowerment (BEE) programmes aimed at uplifting historically disadvantaged people. BEE falls under the South African constitutional mandate to reverse the injustices caused by apartheid. An example of this policy is found in the South African Mineral and Petroleum Resource Development Act (MPRDA), which requires previously disadvantaged people to hold partial shareholding in mining companies. The review of the South African BIT system was triggered by a dispute brought under the ICSID additional facility in 2007 by investors from Luxembourg, who alleged that the BEE provisions of the MPRDA amounted to expropriation of their mineral rights.⁽²⁷⁾ The matter was settled in 2010 without going to full-blown arbitration.⁽²⁸⁾

The Promotion and Protection of Investment Bill is still a draft law and has not yet been enacted. It defines the parameters of an investment, the treatment that investors are entitled to and dispute settlement, among other things. The main concern with shifting from the use of BITs over many years to domestic regulation is the novelty of the idea and the fear that the Bill will deviate from the general provisions in BITs. Foreign investors may become reluctant to invest in South Africa because of inadequate compensation for expropriation, in that an element of objectivity needs to be instilled in the valuation of “just and equitable” compensation.⁽²⁹⁾ However, the Promotion and Protection of Investment Bill introduces some substantive, sometimes subtle, changes to investor protection principles under BITs while, on the face of it, including the usual provisions.⁽³⁰⁾

Concluding remarks

More and more African countries are concluding BITs, with some exceptions. The key issue with respect to BITs and Africa is whether there is a place for BITs in African investment regulation. Despite the controversy and criticism of the BIT system from, the answer to the question should be on a case by case basis. African countries should not, however, assume that the signing of BITs will automatically lead to FDI. There should be broad structural changes and efforts must be made to improve the ease of doing business and reduce transaction costs. BITs should not be viewed as a replacement for such efforts. Different countries should adopt different approaches to investment promotion and protection, depending on their needs. It is clear that where countries wish to enter into new BITs, they should articulate their needs properly. Where countries wish to rely more on domestic regulation, due consideration should be given to international standards that govern investment law and practice, as well as the effective enforcement of such laws.

Written by Magalie Masamba ⁽¹⁾

NOTES:

(1) Magalie Masamba is a Research Associate with CAI. Her key areas of interest are trade and investment promotion, strategy and risk mitigation in emerging markets. Contact Magalie through Consultancy Africa Intelligence's Industry & Business unit ( industry.business@consultancyafrica.com). Edited by Nicky Berg. Research Manager: Ingi Salgado.
(2) ‘Investing in Africa’, Norton Rose Fulbright, June 2008, http://www.nortonrosefulbright.com.
(3) Ibid.
(4) Leo, B., ‘Where are the BITs? How US bilateral investment treaties with Africa can promote development’, Centre for Global Development, August 2010, http://www.cgdev.org.
(5) ‘Bilateral investment treaties: A Canadian primer’, Canadian Council for International Co-operation, http://www.ccic.ca.
(6) Ibid.
(7) Hicks, G., ‘BITs for Africa’, Centre for Strategic International Studies, 6 June 2014 http://csis.org.
(8) Leo, B., ‘Where are the BITs? How US bilateral investment treaties with Africa can promote development’, Centre for Global Development, August 2010, http://www.cgdev.org.
(9) Ibid.
(10) Ibid.
(11) Burgstaller, M. and Ketcheson, J., ‘Investment protection in Africa’, Hogan Lovells, December 2012, http://www.hoganlovells.com.
(12) Ibid.
(13) Leo, B., ‘Rethinking US foreign assistance: Why can’t America do investment promotion in Africa like China (or Canada)?’, Red Interamericana De Proteccion Social, 27 March 2014, http://redproteccionsocial.org.
(14) Johnson, A., 2010. Rethinking bilateral investment treaties in Sub-Saharan Africa. Emory Law Journal, 59, pp. 919-966, http://www.law.emory.edu.
(15) Leo, B., ‘Where are the BITs? How US bilateral investment treaties with Africa can promote development’, Centre for Global Development, August 2010, http://www.cgdev.org.
(16) Ibid.
(17) Johnson, A., 2010. Rethinking bilateral investment treaties in Sub-Saharan Africa. Emory Law Journal, 59, pp. 919-966, http://www.law.emory.edu.
(18) Leo, B., ‘Where are the BITs? How US bilateral investment treaties with Africa can promote development’, Centre for Global Development, August 2010, http://www.cgdev.org.
(19) Ibid.
(20) Green, A., ‘Bilateral investment treaties coming back to bite’, This is Africa Online, 2 March 2012, http://www.thisisafricaonline.com.
(21) ‘Agreement between the Government of Canada and the Government of the Republic of Benin for the promotion and reciprocal protection of investments’, Foreign Affairs, Trade and Development Canada, http://www.international.gc.ca.
(22) Ibid.
(23) Cotula, L., ‘Is the tide turning for Africa’s investment treaties?’, International Institute for Environment and Development, 8 March 2013, http://www.iied.org.
(24) Lang, J., ‘Bilateral investment treaties: A sword or a shield’, Bowman Gilfillan, http://www.bowman.co.za.
(25) Green, A., ‘Bilateral investment treaties coming back to bite’, This is Africa Online, 2 March 2012, http://www.thisisafricaonline.com.
(26) Green, A., ‘South Africa: BITs in pieces’, Financial Times, 19 October 2012, http://blogs.ft.com.
(27) Peacock, N. and Ambrose, H., ‘South Africa terminates its bilateral investment treaty with Spain: Second BIT terminated, as part of South Africa’s planned review of its investment treaties’, Herbert Smith Freehills LLP, 21 August 2013, http://www.lexology.com.
(28) Ibid.
(29) Webb, M. and Rajen, R., ‘South Africa: No more BITs and pieces’, Mondaq, 2 January 2014, http://www.mondaq.com.
(30) Ibid.