It is not often that a South African government department admits it did not know what it was doing. Yet that is what the Department of Trade and Industry has belatedly done , in a recent draft policy paper published for public comment, about the signing of what were to become 45 bilateral investment treaties (BITs) with developed and developing countries, to protect inward and outward investments in the post-democracy era.
The paper, a precursor to a Cabinet memorandum later this year, is part of a policy review that started in October last year, but began life three years earlier, following the loss of SA's first investor-state arbitration, under the Swiss-SA BIT, to a Swiss investor, who suffered a land invasion of his game farm in Limpopo. The review has already had one important casualty: the department has recommended the suspension (and conclusion) of all SA's BIT negotiations, with the apparent exception of Zimbabwe.
Admitting that there was "no legal or economic analysis of the risk associated with the conclusion of BITs", the paper observes that there was "a lack of understanding regarding the real nature and consequences of BITs", as a result of which the "Cabinet was not fully apprised of the dangers inherent in BITs". Remarkably, the document admits that SA has no "outward FDI (foreign direct investment) policy", which is concerning given that the country is uniquely in Africa both a capital exporter and an importer.
The paper's real complaint is that the absence of any proper BIT risk assessment through "the inexperience of negotiators", combined with a lack of knowledge of international investment law, meant that "the impact of BITs on future policies (was) not critically evaluated". A similar lack of co- ordination between government departments meant that SA had no holistic policy perspective when it came to inward and outward FDI. The absence of an effective policy framework, seen in the non-immunisation of affirmative action and similar regulatory measures in SA's earlier BITs, meant that international arbitral tribunals "could find" that such measures breached the country's international law obligations.
Where does this leave SA with 23 ratified BITs, most of which have a 10- to 15-year term, but which protect investments for a further 10 years following one year's notice of termination? The paper argues that SA's earlier BITs, some of which are near the end of their term, should now be renegotiated with a view to clearer language, more "balanced" rights and obligations and adherence to standards which do not "undermine national developmental objectives", as well as the country's right to regulate in the "public interest". The most extreme example of this has been seen in the Andean region of Latin America, where Bolivia in 2007 and Ecuador this year withdrew from the World Bank's International Centre for Settlement of Investment Disputes (ICSID), the world's principal forum for the resolution of investor- state investment disputes. Ironically, SA's continued failure to sign the ICSID Convention, which first entered into force in 1966, means that it cannot avail itself of the convention's annulment procedure for setting aside the most egregious arbitral awards.
One may ask: why the fuss? The paper answers this in part, by observing that there are absolute standards of treatment for investments under BITs or international investment agreements. These require investments to be accorded fair and equitable treatment, full protection and security (a point on which SA lost to a Swiss claimant in the Swiss-SA arbitration), no expropriation without market-related compensation, as well as requiring the free transferability of an investor's funds.
The clash between SA's BIT and its domestic law obligations is most evident in the measure of compensation in the event of an expropriation of property. International investment law, followed in SA's BITs, permits the direct or indirect expropriation of foreign investments provided it is nondiscriminatory, for a public purpose and against the payment of market-related compensation. The paper correctly observes that there is a clear dissonance between these provisions and section 25 of the constitution, which provides for an "equitable balance" in the payment of compensation (which the Constitutional Court has interpreted as less than market value) as well as permitting expropriations in the "public interest" (a broader test than "public purpose"). In words that will not endear it to the Department of Mineral Resources, the paper admits quite candidly that the conversion of "old order" rights into "new order" rights under the Mineral and Petroleum Resources Development Act, 2002 is "a clear example of this tension".
Quo vadis? First, the paper seems to suggest, contrary to the BIT model of third-party investor-state arbitration, where dispute resolution is outsourced to international arbitral tribunals (none of whose members may be drawn from either host or investor states), that investor-state disputes should take place in SA . Arguing that "unequal and exploitative investment agreements ... based on a 50-year- old model" undermined sustainable development, the paper calls for a more equitable balance in SA's BITs. Regulatory policy space was a "key developmental tool" for developing countries, which BITs constrained by "imposing damaging binding investment rules with far-reaching consequences for development". As a result, developing countries were prevented from "requiring companies to transfer technology, train local workers, or source local inputs".
The paper accepts that the government will face "some challenges" from SA's BITs and that the international investor community is aware of BIT protections, which it is increasingly inclined to invoke in the face of "undesirable government initiatives and proposals". As an exercise in "damage control', the policy review should examine SA's potential liability under its BITs and seek to reassess its position once these treaties expire. SA's review of its BIT practices should, the paper says, lead to the preparation of a model BIT that meets its "developmental needs", balancing "investor certainty" against its own "legitimate interests".
It is noteworthy that the paper was published about the same time as a United Nations Conference on Trade and Development (Unctad) investment policy perspective on Group of 20 (G-20) countries following the April G-20 summit in London. In responding there to the global financial crisis , G-20 members, including SA, promised to maintain their trade and investment regimes to avoid a retreat into protectionism. Observing that the effective promotion of investment, particularly for developing countries, was a key remedial measure to manage the crisis, Unctad noted international investment agreements have an important role to play in ensuring the "predictability stability and transparency of national investment regimes".
Warning against ephemeral measures to prevent investment protectionism and economic nationalism, Unctad advised countries to strengthen the investment promotion of their international investment agreements to encourage "outward investment" and promote "international co-operation". The department's policy review would be well advised to take heed of this and avoid the economic autarky that has characterised similar policy reviews in the Andean region.
Written by: Peter Leon of Webber Wentzel
First published in the Business Day on 16 September 2009