18 October 2012

South Africa: Govt Begins Shredding 'First Wave' Investment Treaties

European investors and trade officials look on with worry as South Africa cancels a bilateral investment treaty with Belgium and Luxembourg; the first of a series of planned shreddings

South Africa has terminated a bilateral investment treaty (BIT) with Belgium and Luxembourg in the first of a series of planned shreddings of post apartheid-era agreements now coming up for renewal. Western investors and trade officials are worried.

BITs are international treaties between states under which each government undertakes reciprocal obligations in respect to inward investments made by nationals from the other state in its territory. BITs enable foreign investors to take compensation claims against governments to international tribunals, notably disputes about fair and equitable treatment, security, and compensation for expropriation.

South Africa signed them in a hurry to attract investment after apartheid, since BITS were predicted to catalyse FDI. But the government later found itself in the dock when attempting to implement the Black Economic Empowerment programme, which sought to mandate black participation in commercial enterprises, which some foreign investors claimed diluted or expropriated their investment.

In 2007, investors from Italy and Luxembourg filed a claim arguing that South Africa's 2002 Minerals and Petroleum Resources Development Act (MPRDA) contained provisions that amounted to expropriation of their mineral rights, violating the BITs South Africa had signed with both countries.

The investors lost, and the government - bruised by the encounter - decided to launch of review of BITS in 2010. It concluded they "pose risks and limitations on the ability of the government to pursue its constitutional-based transformation agenda."

A spokesperson for the South African Department of Trade Industry told This is Africa: "The South African government recognised that it has an investment protection legal framework in place that matches world standards and that the risks posed by BITs vastly outweigh their purported benefits".

South Africa has 13 agreements with EU states, all now rumoured to be up for cancellation. Existing investments will enjoy the same protection for 10 years, but new investments will not be covered by the agreements. Karel de Gucht, the EU's trade commissioner, told one recent conference he was "disappointed" at the recent move, which will "certainly affect the investment climate".

European businesses need bilateral agreements to secure affordable insurance to raise capital for foreign ventures. For German investors, political risk insurance can only be secured if the investment destination country has a BIT with Germany. But countries elsewhere are more flexible. China is a prolific BIT signatory, but Chinese companies continue to invest in jurisdictions without one.

There are around 2,500 BITs in play worldwide. Philip Morris, Total, Siemens and Cargill have all taken states to arbitration, with Sri Lanka suffering the first award against a developing country in 1990. Many are settled at the International Centre for the Settlement of Investment Disputes (ICSID) in Washington.

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