The Department of Trade and Industry has had a veritable bee in its bonnet about the 46 bilateral investment treaties (BITs) that the Nelson Mandela and Thabo Mbeki administrations signed in the post-1994 decade of South Africa’s economic liberalisation.

This was to witness the opening up of an ossified apartheid-era economy through sweeping trade liberalisation, exemplified by the 1999 European Union (EU)-South Africa Trade, Development and Co-operation Agreement, under which 90% of EU-South Africa trade was freed under an asymmetric tariff phase-down arrangement, the partial privatisation of major state-owned entities (Telkom, South African Airways and the Airports Company South Africa) and, at the end of the Mbeki presidency, an ambitious, but still incomplete, programme to establish a Southern African Development Community (Sadc) common market, modelled on the EU, through the 2006 Sadc Protocol on Finance and Investment that came into force in 2010.

In its 2009 BIT review, the department castigated BITs as “unequal and exploitative investment agreements” that prevented developing countries from “fighting poverty”. Trade and Industry Minister Rob Davies went further in July 2012, describing South Africa’s investment treaties as potentially inimical to the government’s “transformation agenda”, while investor-state dispute settlements allegedly promoted “narrow commercial interests” through “unpredictable international arbitration”. Accordingly, all “first-generation” BITs would be terminated by the government, but possibly renegotiated on the basis of a new-model BIT, which would provide the state with the policy space to pursue “legitimate public policy objectives”.

The department has subsequently made good on its promise: the Belgium-Luxembourg BIT was terminated on its 10th anniversary last March, followed by that with Spain in June and, in October, those with the Netherlands, Germany and Switzerland, all EU members, other than Switzerland.

The terminated and existing BITs are now to be replaced by the Promotion and Protection of Investment Bill, which was published for three months of public comment on November 1. Although the bill’s objectives proclaim that South Africa is committed to an “open and transparent” investment environment and a business environment that “expeditiously facilitates” investment, in practice it substantially diminishes the investment protection afforded to foreign investors under South Africa’s BITs at present.

This is for several reasons. First, the definition of “investment” requires more than shares or contractual rights, which would be typical of a BIT, but a “material economic investment or significant underlying physical presence” in South Africa. More important, unlike the BITs, the bill adopts a parsimonious approach to expropriation by expressly limiting its circumstances. Indirect expropriation now appears exempt from protection, as are measures that protect or enhance state security, or where there is a deprivation of property without any concomitant acquisition of ownership by the state. Likewise, unlike the BITs, which offer full market-value compensation in the event of an expropriation, the bill’s measure of compensation echoes section 25 of the constitution by providing an “equitable balance” between the public interest and the affected party, having regard to a number of factors, including the use of the investment and the purpose of the expropriation.

The bill is emphatic about the state’s right to regulate in the public interest. To this end, it permits the government (or any of its organs) to take measures which, among other things, “redress historical, social and economic inequalities”, as well as (presumably with an eye on the mining industry) “foster economic development, industrialisation and beneficiation”.

While the bill commendably prohibits discriminating against foreign investors by according them national treatment as well as equal security and treatment in relation to domestic investors, the important BIT prohibition on the unfair and inequitable treatment of such investors is completely absent from it. This key rule-of-law protection of procedural fairness requires states not to act arbitrarily or abusively towards foreign investors, through coercion, duress or harassment, or by failing to respect the fundamental principles of due process.

Perhaps most important, recourse to international arbitration, a fundamental feature of investor-state dispute settlement under the BITs, is explicitly removed under the bill. Investors will now have to avail themselves of the department’s mediation facilities, and have recourse to the South African courts or domestic arbitration under South Africa’s antiquated Arbitration Act of 1965. This is a marked deviation from international best practice in relation to investor-state dispute settlement as access to independent and impartial international arbitration is a hallmark of effective investor protection.

Although the department’s BIT review makes much of the “excellence” of the country’s judiciary, this misses the point. The domestication of investor-state dispute settlement is exceptional in international investment law. Although Australia’s previous Labor government insisted on it in the US-Australia free-trade agreement, the present Liberal-National coalition has reinstated investor-state dispute settlement in the recently concluded Australia-South Korea free-trade agreement, thus removing one of the department’s key country exemplars.

There is a good reason for this. Access by investors to international arbitration, rather than the domestic courts, provides them with an independent and neutral forum that will not be influenced by local policy considerations. While the department has described international arbitration as “unpredictable”, South Africa’s continued refusal to sign and ratify the Washington Convention, which established the International Centre for Settlement of Investment Disputes in 1965, means, ironically, that it cannot invoke the centre’s ad hoc review mechanism for setting aside the most egregious arbitral awards.

Bizarrely, while the bill provides investors with no protection for unfair and inequitable treatment, affords them below-market-value compensation for expropriation and denies them access to international arbitration, all of these protections are expressly provided for in the Sadc protocol that South Africa ratified in June 2008. The protocol is based on the creation of a “predictable” investment climate through the enforcement of “open and transparent” investment policies. Importantly, the protocol is not restricted to Sadc investors, but to all investors with a lawful investment in a Sadc member state. The only qualification is that an investor must first exhaust its domestic remedies before having access to international arbitration. In addition, the protocol applies only to investment disputes arising after its entry into force on April 16 2010. South Africa could, of course, withdraw from the protocol on 12 months’ notice to Sadc, but given the importance of the regional integration project, this would be politically difficult.

As all the protections of what the department describes as “old-style BITs” are contained in the protocol, one wonders not only how it came to be ratified in 2008, but how it can be squared with the lesser investment protection now on offer under the bill. Or, to paraphrase George Orwell, is this a case of some BITs being more equal than others?

Leon is head of the mining sector group at Webber Wentzel.

Source: http://www.bdlive.co.za/opinion/2014/01/16/diluting-foreign-investors-protection-makes-no-sense