The Expert Explains: Do Bilateral Investment Treaties matter?
Bilateral investment treaties (BITs) are a well-established mechanism which are intended to foster investments between countries, and UNCTAD estimates that there are now over 3200 investment agreements globally, including almost 300 involving African countries. Why, then, has South Africa decided to scrap its BITs in favour of a new, and controversial, domestic Bill on the Protection and Promotion of Investment, and what approach are other countries taking? For those who wish to dig deeper, here’s the explanation, straight from the desk of our expert guest contributor, Samantha Seewoosurrun, a reputed professional consultant in the financial services sector.
A BIT is an agreement between one country (the ‘host’ state) and another ‘the ‘home’ state) to provide benefits and investment protection for the home state in the host state. The core provisions normally include protection of unlawful expropriation or nationalisation, ‘most favoured nation treatment’ (so no foreign investor in similar circumstances is treated more favourably) ‘national treatment’ (to ensure that treatment is comparable to that of nationals), amongst others. There is often provision for ‘alternative dispute resolution’ in the form of international or independent arbitration, with the World Bank’s International Centre for the Settlement of Investment Disputes (ICSID) being one of the preferred forums.
BIT agreements are popular with investors in African countries, many of which still suffer from weak adherence to the rule of law. The OECD has noted that the cost of enforcement of a contract in Africa is nearly 50% of the investment’s underlying value and that it takes on average two years to enforce a contract.
There has been significant growth in BITs concluded with African countries in recent years, with China leading the charge. Since 1989, China has signed BITs with 33 African countries, of which 16 have entered into force. Representatives of Beijing-based law firm King & Wood Mallesons recently commented that “the BITs signed between China and African countries are an important and effective investment protection tool readily available to Chinese investors in Africa and vice versa”. Figures from China’s Ministry of Commerce (MOFCOM) would appear to support this assertion, highlighting that January-June 2014 saw total Chinese investment in Africa hit USD 3.5 billion, representing a 19% increase in the same period in 2013 and a six-fold increase since 2006.
So where do other countries stand? Canada is quietly making its way around the African continent signing BITs, with a clear focus on the major economies such as Nigeria, and by the time it has finished with those on its list it will have covered the countries representing approximately two-thirds of sub-Saharan Africa’s GDP. Mauritius has placed a strong emphasis on building a network of investment treaties with African countries, with the most recent agreement signed with Zambia in July 2015. India also has 40 BITs in place across the world, with those in Africa covering Mauritius, Ghana and Mozambique, amongst others.
Looking to Europe, Germany is top of the class, with BITs concluded with African countries which represent 96% of regional GDP. The EU is also seeking to strengthen its hand with the adoption of new trade and investment strategy earlier this month, which highlights that the EU will “consider bilateral investment agreements with key African economies based on economic criteria and the existing legal framework for foreign investment”.
The United States, somewhat surprisingly, is well behind the curve by comparison. Some US commentators question why the country only managed to negotiate two BITs with African countries over two decades, and why it has focused instead on non-binding Trade and Investment Framework Agreements (TIFAs). TIFAs have been concluded with countries including Mozambique, Rwanda and Mauritius (although in the case of the latter the Mauritian Ambassador to the US recently called upon the President to make progress in negotiations in concluding a BIT between the two countries).
So, if we come back to South Africa, which had signed 45 BITs with countries around the world, why is the Parliamentary Committee on Trade and Industry currently discussing a new Promotion and Protection of Investment Bill, intended to replace the BITs?
The new Bill follows a review initiated back in June 2009, when the Department of Trade and Industry concluded that South Africa “should review its BIT practices, with a view to developing a model BIT that is in line with its development needs” which would strengthen the country’s investment regime. This review was triggered by a dispute brought under the auspices of the ICSID in 2007 by investors from Luxembourg, related to alleged expropriation in the context of Black Economic Empowerment provisions of the Mineral and Petroleum Resource Development Act (MPRDA), which was settled in 2010.
In a nutshell, South Africa is moving to a system of domestic regulation, where investment disputes will be dealt with in domestic courts, with no recourse to international arbitration. The move has been criticised on a number of fronts, with European and American Chambers of Commerce claiming that it will lead to a flight of capital our of South Africa, while some claim it will breach obligations of the Southern African Development Community. The Director-General of the South African Department of Trade and Industry, Lionel October, insists that critics have their facts wrong.
Which is the most effective approach, therefore, to protecting investors? Is the Government of South Africa right to stick to its guns, or should it listen to the industry to avoid flight of capital? It should be noted that Brazil, for example, is not party to any BITs but still receives substantial foreign investment. At the end of the day, BITs are probably only one relevant factor in investment decisions, but South Africa will need to prove that its new domestic regime is fully in line with international rules or will otherwise suffer the consequences.