02-08-2012 | The future of SA's bilateral investment treaties

02-08-2012 | The future of SA's bilateral investment treaties

South Africa has many BITs, the aim of which is to provide protection to foreign investors. On 26 July 2012 the Department of Trade and Industry released a media statement revealing that South Africa intends to refrain from entering into any future bilateral investment treaties (“BITs”).

At the launch of the South African United Nations Conference on Trade and Development (UNCTAD) Investment Policy Framework for Sustainable Development, Trade and Industry Minister Rob Davies stated that unless there are compelling economic and political reasons, South Africa will avoid entering into BITs in the future. It is of course in any country’s best interest to only enter into a BIT if it makes economic and political sense as it could restrict a country’s policy space. This could be especially true if the South African government wants to pursue its Constitutional-based transformation agenda. Countries must also ensure that they do not enter into a race to the bottom to attract investment, but also achieve benefits, such as skills development, technology transfer and sustainable economic linkages from the investment. The question that remains unanswered is what constitutes compelling economic and political reasons.

It is further reported that the Minister went on to state that “Cabinet instructed that all first generation BITs which South Africa signed shortly after the democratic transition in 1994... should be reviewed with a view to termination.” This does not bode well for business confidence, both for foreigners investing in South Africa or for South Africans investing abroad. As an example the BIT between South African and Zimbabwe provided much needed confidence for South African businesses venturing into Zimbabwe. Providing protection from expropriation of investments is also a key consideration for foreigners investing in South Africa. Recently some Italian investors proceeded with arbitration proceedings against South Africa at ICSID (the World Bank’s International Centre for Settlement of Investment Disputes) in terms of the South African - Italy BIT. The Italian investors claimed that their expropriation of certain mining rights in terms of South Africa’s Black Economic Empowerment policy violated the provisions of the specific BIT. Had it not been for the BIT, the Italian investors would not have been able to bring such a dispute and attempt to enforce their rights, as under South African law the expropriation and the manner in which it occurred was sanctioned. The BITs therefore do play a role in investors’ decisions to invest in markets.

Although the aim is to terminate the current BITs there is hope that the current BIT’s may be renegotiated. However investors may have to wait some time as it is only anticipated that such renegotiation may commence once a model for bilateral investment treaties had been developed. Minister Davies did indicate that the government favours a favourable investment climate that favours inclusive growth and sustainable development. An Inter-Ministerial Committee has been tasked with the oversight of BITs. According to Minister Davies, “key considerations would be to codify BIT-type protection into South African law and clarify their meaning in line with the South African Constitution. We would also seek to incorporate legitimate exceptions to investor protection where warranted by public policy considerations such as national security, health, environmental reasons or for measures to address historical injustice and/or promote development". Although the domestication of protection for foreign investors will be welcomed by foreigners as it would allow them to enforce their rights in South African courts, they may be sceptical as to the proposed exceptions to such protection, such as expropriation.

Rian Geldenhuys
© Trade Law Chambers 2012