In the current economic climate, with questions being asked by foreign investors about labour relations, implementation of a new mining rights regime and general policy drift, the timing of government’s decision to cancel bilateral investment treaties (BITs), which guarantee foreign investors in South Africa’s economy certain protections, has raised eyebrows.

According to Jonathan Lang, Head of Bowman Gilfillan Africa Group, South Africa’s BITs, in common with other countries, seek to give investors assurances as to expropriation, security, repatriation of capital and income from investments, equality of treatment with domestic investors and international arbitration of disputes.

However, it seems that government’s view is that in the desire to attract investment, insufficient heed was paid to the less attractive consequences of  earlier treaties with the EU. As a result, it is proposing changes to the way in which protections are ensured, while maintaining its right to implement policies to address the country’s social and economic requirements, and to redress the injustices of the past through affirmative action.

“The first BITs entered into post-1994 were regarded as skewed towards investors, with aspects of the agreements incompatible with the Constitution and other South African laws. The view was that BITs allowed for legal challenges to regulatory changes that the government considered to be in the public interest, and that the policy framework should be restructured,” said Lang.

The process of introducing legislation to replace the protections afforded by BITs started when the draft Promotion and Protection of Investment Bill was published for public comment on 1 November this year.

On the face of it, Lang said, the Bill includes the usual features of bilateral investment treaties while attempting to redress the balance between the needs of foreign investors and the government’s right to implement policy. However, the use of domestic legislation rather than an international treaty is a departure from South Africa’s previous approach to foreign investor protection.

He commented that, “The important distinction is that a treaty is an agreement between nation states that cannot be amended unilaterally. Domestic legislation is subject to amendment by one of the protagonists, namely the government with the approval of the legislature. From a foreign investor’s perspective, the adoption of domestic legislation to replace bilateral treaties in itself diminishes the degree of protection they are afforded.”

The Bill itself also introduces some important changes to investor protection principles under BITs. For example, BITs typically include protection against expropriation and provide for compensation in the event of expropriation.

Lang noted: “While the draft bill does not, on the face of it, appear to be a material departure from the traditional BIT approach, it seems that government’s purpose in reformulating the protection is to protect itself against claims by foreign investors that black economic empowerment legislation and the Minerals and Petroleum Resources Development Act, for example, may amount to indirect expropriation of property.”

Investors also want assurance that, having invested in a foreign country, they will be entitled to repatriate their capital and the income. The latter is usually referred to in BITs as “returns”, including profits, interest, dividends, capital gains, fees and royalties.

The Bill does not define or refer to repatriation in this context at all and Section 10 does not expressly provide a right of repatriation of investments and returns, according to Lang.

Fair and equitable treatment is a common principle of BITs and is accompanied by an additional obligation on the host government not to impair by “unreasonable or discriminatory measures”, the use, management or enjoyment of the investment. The Bill does not include any fair and equitable treatment protections.

Lang added: “A cornerstone of BITs worldwide is recourse to international arbitration. By taking the process for dispute resolution outside the host nation to an ostensibly neutral tribunal, foreign investors have a greater degree of comfort that they will receive equal treatment and, importantly, privacy.

“The Bill does not expressly provide for international arbitration. Instead it provides that the Minister shall promulgate regulation governing the mediation process. Foreign investors are likely to find themselves subject to the determination of the domestic courts on whether to appoint an international or domestic arbitrator.”

The Bill is in draft form and open to public comment until 1 February 2014, after which government will publish the Bill and steer it through the legislative process to become law.

It is not clear how the new law will co-exist with BITs which are still in effect or the transitional protections under terminated BITs. Transitional arrangements continue to provide treaty protection for investments made before termination of the treaty for periods of up to 20 years. So, from a treaty perspective, existing foreign investors will continue to receive the benefit of treaty protection for some time to come, but new foreign investors will not.

“An aspect of BITs to which the Government does not seem to have given as much attention is that they are double edged swords which afford protections to investors from each country signing a treaty.

“This may be fairly academic between South Africa and most European countries, as the preponderance of investment has been one way. But in the context of Africa, government should bear in mind the needs of its own investors. South African companies are significant investors in Africa and when the boot is on the other foot, domestic legislation may not appear quite as attractive,” said Lang.