Building capacity to help Africa trade better

Another BIT bites the dust


Another BIT bites the dust

Sean Woolfrey, tralac Researcher, discusses South Africa’s decision to terminate its bilateral investment treaty (BIT) with Germany in the context of Government’s new investment policy framework

Last week South Africa terminated its bilateral investment treaty (BIT) with Germany, bringing to three the number of BITs the country has terminated in little over a year. In September 2012, South Africa terminated its BIT with Belgium and Luxembourg and in June this year the country terminated its BIT with Spain. The termination of the German treaty is undoubtedly the most significant given the importance to the South African economy of trade with – and investment from – Germany. The European powerhouse is South Africa’s third most important trading partner (after China and the United States), and is also the fourth biggest holder of foreign investment in South Africa (after the United Kingdom, the Netherlands and the United States).

The termination of the German BIT should not come as a surprise, however, as Minister of Trade and Industry, Rob Davies, signalled more than a year ago that the South African government was seeking to overhaul its investment policy framework and, in particular, to replace its bilateral investment treaties with a single piece of domestic legislation which would simultaneously protect investor rights and safeguard domestic policy space. Notwithstanding this fact, the cancellation of the German treaty was met with concern by German officials. The German Ambassador to South Africa, Horst Freitag, noted his country’s regret at the termination, indicating that “for the sake of investor confidence and predictability, we would have preferred if this step had not been taken”.

Although protection provided under the German BIT will continue to apply to existing investments for a period of 20 years, new investors will not receive these benefits. Director of the South African-German Chamber of Commerce and Industry, Matthias Boddenberg warned that “in the absence of a legal framework dedicated to the protection of investments, new entrants might be deterred from a commitment to South Africa’s economy”. He also suggested that the termination of the BIT “could have a negative impact on general investor confidence” and emphasised the importance of such treaties to the many small and medium-sized German companies that had invested in South Africa.

The South African media has been critical of the termination of the country’s BITs and has suggested that these actions create increased uncertainty for foreign investors and are likely to deter foreign investment in the country. The South African government, however, feels that there are legitimate concerns behind its desire to overhaul the country’s existing investment policy framework and to replace South Africa’s BITs with domestic legislation. These concerns include the fact that BITs give foreign investors greater rights and protection than domestic investors, and the fact that provisions for investor-state arbitration contained in BITs allow foreign investors to challenge domestic public interest laws and measures in front of ad-hoc international arbitral tribunals.

South Africa is certainly not alone in reviewing its stance towards BITs. A number of countries have recently begun to examine the degree to which BITs intrude on their domestic policy space and undercut the jurisdiction of their national courts. Some, including Canada, Sweden and the United States, have conducted reviews of their BIT policies. Australia has moved to exclude investor-state dispute provisions from its international investment agreements, while Brazil refuses to enter into BITs at all. A number of Latin American countries have also started to terminate their existing BITs. Globally, both developing and developed countries are increasingly seeking to adopt approaches to investment promotion and protection which better balance the requirements of investors and the right of governments to regulate in the public interest on matters relating to environmental protection, public health and social equality.

Regardless of the precise merits of South Africa’s change of direction with regard to its investment policy framework, the Government’s termination of the country’s BITs does raise a number of issues. The first relates to the message conveyed by the unilateral termination of South Africa’s investment treaties. It is likely that at least some of the concern on the part of South Africa’s European partners comes from the fact that the South African government does not appear to have considered the possibility of at least attempting to renegotiate the terms of its treaties with European countries before cancelling them. Regardless of whether the European partners in question would have agreed to amend the treaties in such a way as to address South Africa’s concerns, the mere act of seeking renegotiation would have sent a better signal to foreign investors.

The second issue concerns the timing of the termination of the German BIT. Unlike South Africa’s BIT with Belgium and Luxembourg, which would have been renewed for a further 10 years had South Africa not given notice of its intention to terminate when it did, the German BIT can be terminated at any time. For this reason it does not make much sense that the South African government sought to terminate such an apparently important treaty before the domestic legislation which is supposed to replace it and other BITs has been put into place. The Promotion and Protection of Investment Bill has recently been approved by Cabinet, but has not yet been published. It is also unlikely to become law for at least a few months. This means there is likely to be a significant and unnecessary gap between the scrapping of the German BIT and the introduction of the law to replace it, something that is bound to create uncertainty.

The third issue arising from South Africa’s cancellation of its BITs relates to the way the Government has framed its actions. As already alluded to, the Government considers there to be real and legitimate concerns behind these actions, and South Africa is not alone in taking such steps. Nevertheless, the South African government has been somewhat disingenuous in its rhetoric. Instead of being open and honest about its desire to create a more level playing field between domestic and foreign investors and to ensure that the promotion and protection of foreign investment does not unnecessarily constrain its ability to enact laws and measures it perceives to be in the public interest, the Government has insisted that its “intention is to upgrade the investment framework in South Africa to ensure that we have a modern piece of legislation that will provide certainty, predictability and a stable environment for any investor in South Africa”.

The problem with this rhetoric is that from the point of view of foreign investors, it is virtually inevitable that the standard of investment protection provided for under the new legislative regime for foreign investment is likely to represent a ‘downgrade’ from the standard provided under South Africa’s BITs with its European partners. For example, it seems that the new Investment Bill will not provide for international investor-state arbitration. In addition, it appears that the new regime will allow for less than market value compensation in cases of expropriation, especially where the expropriation has been undertaken for a public interest purpose. This would, after all, be consistent with the Constitution. BITs, by contrast, generally specify compensation to be at full market value. Furthermore, moving from BITs to domestic legal protection of foreign investment cannot honestly be said to increase certainty and predictability for foreign investors, as domestic law, including the Constitution, can be unilaterally amended at any time, something that is not the case for international treaties.

Finally, South Africa’s overhaul of its investment policy framework appears to suggest that the country is trying to have its cake and eat it with regard to investment protection. The country is phasing out its BITs with countries that are significant investors in South Africa and replacing these with domestic legislation. In doing so, it reduces the likelihood of being the respondent in any future international investor-state arbitrations. At the same time, there seems to be less emphasis on phasing out BITs South Africa has with countries that are considered to be recipients of South African investment, such as Zimbabwe. This, allied with the fact that the Government has also been working on a Model BIT to be used in cases of “compelling economic and political circumstances”, suggests that South Africa does see the value in using such instruments when dealing with countries where the protection of South Africa’s foreign investments abroad is likely to be more relevant than the protection of inward investment in South Africa.



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