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South Africa’s stance on bilateral investment treaties


South Africa’s stance on bilateral investment treaties

Sean Woolfrey, tralac Researcher, discusses South Africa’s stance on bilateral investment treaties

Of late there has been much discussion in the South African media concerning the government’s approach to foreign investment, and, in particular, its stance on bilateral investment treaties (BITs). This follows speeches given by Minister of Trade and Industry Dr Rob Davies in Geneva and Johannesburg late last month as part of the launch of UNCTAD’s Investment Policy Framework for Sustainable Development. In these speeches, Davies reiterated the South African government’s desire to refrain from entering into BITs in the future, “except in cases of compelling economic and political circumstances”. Davies also noted that following a three year review of South Africa’s BITs, the government was firmly of the opinion that all of the “first generation” BITs concluded by the country shortly after the end of apartheid “should be reviewed with a view to termination, and possible renegotiation on the basis of a new Model BIT to be developed”.

BITs are binding international agreements between two countries under which each country undertakes certain obligations with respect to investments made by nationals of the other country within its territory. Generally, BITs create obligations concerning the provision of fair, equitable and non-discriminatory treatment to investments made by nationals of the other country, compensation in the event of expropriation or damage to such investments, guarantees of free transfer of funds and access to mechanisms for settling disputes between states and investors.

In the immediate post-apartheid years, the South African government, desiring to create an investor-friendly environment, embarked on a spree of BIT-signing. It concluded a number of such agreements, most notably with a group of European countries that had traditionally been the largest sources of foreign direct investment (FDI) in the country. More recently, the government has become increasingly aware of the impact that such agreements can and do have on domestic policy space. The BIT policy review undertaken between 2008 and 2010 noted that BITs “extend far into developing countries’ policy space, imposing damaging binding investment rules with far-reaching consequences for sustainable development,” and that BITs often allowed for individuals and firms to challenge regulatory changes which a government considers to be in the public interest.

This latter point had already been illustrated by a dispute brought against the South African government in 2007 by a group of Italian citizens that had invested in the South African quarrying sector. These investors claimed that legislation enacted in 2004 to increase the participation of historically disadvantaged South Africans in the minerals sector effectively ‘extinguished’ their mineral rights without providing adequate compensation, and that this was contrary to South Africa’s obligations under the Italy-South Africa BIT.

Given the increasing emphasis being placed on policy space in the South African context, it is not surprising that the government is revising its approach to BITs. In addition to adopting a more cautious stance towards agreeing new BITs, the government has also decided that it will not seek to renew its various BITs which have now reached their termination date. Instead, government will seek to codify BIT-type protection into domestic law, ensuring that such protection is consistent with the South African Constitution. In addition, exceptions to investor protection – for legitimate public interest concerns – will be incorporated so as to provide a greater balance between the rights of investors and the retention of policy space for regulating in the public interest.

The decision not to renew existing BITs will mean the gradual phasing out of South Africa’s numerous BITs with European countries, which account for over 80 percent of total FDI in the country. Unsurprisingly, the decision has been met with concern by European officials and business leaders, who argue that the BITs have worked very well in promoting and protecting European investment in South Africa. Concerns over the government’s stance has also been raised within South Africa by commentators who fear that such an approach paves the way for resource nationalism and could scare off potential investors.

While concerns over the effect the government’s stance will have on South Africa as an investment destination may have some merit, they involve implicit assumptions which themselves are not entirely unproblematic. In particular, defenders of traditional BITs assume that these instruments promote inward FDI. At face value this would seem to be a fair assumption, given the emphasis generally placed on the need for a secure and predictable regulatory environment in order to attract FDI. Unfortunately, however, a large body of literature devoted to this issue has signally failed to demonstrate a consistent and positive relationship between BITs and inward FDI, and the empirical findings on whether BITs lead to greater FDI inflows is ambiguous at best. Brazil provides further evidence of this ambiguity, as the country has become a major recipient of global FDI flows, while refraining from the use of BITs.

In South Africa’s case the fact that major sources of FDI, such as the UK, Germany, the Netherlands and Switzerland all have BITs with the country, does not prove that these instruments have promoted FDI inflows, as all four countries were major sources of investment in South Africa prior to the conclusion of their respective BITs. The United States, meanwhile, continues to be another major source of FDI in South Africa, despite no BIT existing between the two countries.

Even if it was possible to show a positive causal relationship between BITs and FDI inflows, the question would still remain whether FDI attraction is desirable in of itself, especially if this comes at the expense of other policy goals. As the BIT policy review points out, the status quo in the current global investment regime – dominated as it is by the use of BITs – puts governments, and especially developing country governments, at a disadvantage, by constraining policy space and allowing for investors to take disputes against host countries to international arbitration, thereby leapfrogging domestic legal systems and the safeguards for public interest contained therein. A good example of this is the recent case brought by tobacco multinational Phillip Morris against the government of Australia in response to moves by the government to introduce regulations on cigarette packaging in order to address public health concerns. While Phillip Morris lost its case in the Australian High Court, it has now launched a claim under the Australia-Hong Kong BIT.

Certainly, good arguments can be made for the need for clear and transparent regulations on FDI in countries such as South Africa. What is less clear is the degree to which governments should cede policy space in order to create an investor friendly environment, especially when the benefits from having such an environment are not that obvious. In South Africa’s case, a move from using BITs to protecting FDI under clear and appropriate domestic legislation (as provided for in the case of the Australia-United States Free Trade Agreement) may indeed provide a better way for promoting and protecting foreign investment while also advancing the developmental needs of the country.



Davies, R. 2012. The Minister of Trade and Industry, Dr Rob Davies, at the Discussion of UNCTAD’s Investment Policy Framework for Sustainable Development (IPFSD) in Geneva, Switzerland. Available online at: http://www.dti.gov.za/delegationspeechdetail.jsp?id=2506

Department of Trade and Industry. 2009. Bilateral Investment Treaty Policy Framework Review: Government Position Paper. DTI, Pretoria.


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