Sean Woolfrey, tralac Researcher, comments on recent foreign investment policy issues in southern Africa

Issues of investor protection in southern Africa have been in the news of late. In November last year the South African government took a major step in its ongoing overhaul of the country’s investor protection regime. Having already signaled its intention to terminate a number of its bilateral investment treaties (BITs), the Government published the draft Promotion and Protection of Investment Bill, which is meant to effectively replace South Africa’s terminated BITs in terms of providing for the protection of investments in the country. The Bill has provoked much debate in South Africa due, among other things, to a perception that the standard of protection it provides to foreign (and local) investors in South Africa is somewhat lower than that provided under the country’s terminated and soon-to-be-terminated BITs. Notably, the draft Investment Bill does not include an obligation on the South African government to provide ‘fair and equitable treatment’ to investors, does not guarantee foreign investors the right to free repatriation of returns, conceptualises expropriation very narrowly and permits the Government to provide less than full market value compensation in cases of legitimate expropriation. Perhaps most controversially, the draft Bill does not expressly provide recourse for investors to refer disputes against South Africa to international arbitration.

As part of the South African government’s overhaul of its investor protection regime, it is also developing a model BIT to be used as the basis for negotiating future BITs where there are compelling economic reasons to do so. The Government has indicated that its model BIT will be consistent with the Southern African Development Community (SADC) Model BIT finalised in 2012. The SADC Model BIT, which was developed in line with the overall goal of the SADC Protocol on Finance and Investment to promote the harmonisation of SADC Member States’ investment policies and laws, provides a template for SADC Member States to use in the development of their own model BITs or as a guide for future investment treaty negotiations.

What is particularly interesting about the SADC Model BIT template is that it recommends a number of deviations from standard BIT provisions. For instance, it recommends specifying exceptions for measures relating to public morals and safety, the protection of human, animal or plant life or health, the conservation of natural resources, environmental protection, prudential matters and taxation measures, as well as for existing non-conforming measures and ‘excluded sectors’, and omitting a most-favoured nation (MFN) provision. The SADC Model BIT template also recommends that SADC Member States should include various investor obligations, an article confirming a host state’s right to regulate in the public interest and a provision on ‘fair administrative treatment’ rather than the increasingly controversial ‘fair and equitable treatment’ provision found in most BITs. It also recommends providing for ‘fair and adequate’ compensation in cases of legitimate expropriation, rather than ‘prompt, adequate and effective’ (generally interpreted as full market value) compensation, and omitting any provision providing foreign investors with recourse to international investor-state dispute settlement procedures, or, if such a provision is to be included, qualifying it by requiring that investors first exhaust local remedies.

The development of the SADC Model BIT and the publication by South Africa of the draft Promotion and Protection of Investment Bill raise questions about the future of the SADC Protocol on Finance and Investment (FIP), which came into force in 2010. This is because Annex 1 of the FIP, the ‘Investment Annex’, contains a number of provisions which provide foreign investors in SADC with BIT-type protection and which are inconsistent with the recommendations contained in the SADC Model BIT and the provisions contained in South Africa’s draft Investment Bill. For example, the FIP’s Investment Annex, which applies to all investors in the SADC region, regardless of whether they come from a SADC Member State, guarantees ‘fair and equitable treatment’ and ‘prompt, adequate and effective’ compensation in cases of legitimate expropriation. It also provides investors with the right to refer disputes with SADC Member States to binding international arbitration.

The fact that the FIP provides foreign investors in the SADC region to refer disputes against their host state to international arbitration is particularly significant, as it provides an avenue for foreign investors in South Africa to refer investment disputes against South Africa (and other SADC Member States) to international arbitration, even though the South African government has sought to deliberately exclude this possibility in its new investor protection regime. Although the FIP and its Investment Annex appears to have been largely overlooked as an instrument of investor protection in SADC, possibly due to a lack of clarity around its scope and some of its provisions, at least one dispute has been initiated via the FIP’s dispute settlement provisions.

In 2012, a group of investors gave notice that they were exercising their right under Article 28 of the FIP’s Investment Annex to refer a dispute against Lesotho to international arbitration. The investors’ central claim against Lesotho is that the country’s participation in the disbandment of the SADC Tribunal constitutes a denial of justice under customary international law and a breach of several investor protection provision contained in the FIP (including obligations on fair and equitable treatment, “access to courts and tribunals” and a general undertaking to fulfill obligations arising from the protocol”). The Claimants, who had acquired mining leases in Lesotho in the mid-1980s but had later seen these cancelled by the Lesotho government when the latter needed to flood the area concerned in order to construct a dam, had been pursuing legal claims against Lesotho before the SADC Tribunal at the time it ceased to be operational. As a result, they now allege that through its involvement in the Tribunal’s disbandment, Lesotho (in concert with the other SADC Member States) took measures to frustrate the hearing of their original claim.

The inconsistencies between the SADC Model BIT and South Africa’s new investor protection regime on the one hand, and the provisions of the FIP’s Investment Annex on the other, are unlikely to be tolerated by SADC Member States for very long, especially if, following South Africa’s cancellation of its BITs, other countries in the region follow suit. Such a process could result in the FIP’s Investment Annex becoming the main or only avenue for investors in the region to pursue claims against the region’s governments through international arbitration. It would seem a good bet then, that the SADC FIP, or at least its Investment Annex, is likely to be renegotiated in the not-too-distant future. Whether or not this would be a positive step for the region, is another matter entirely.

Tell us what you think.

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