SA's cancellation of bilateral investment treaties - strategic or hostile?

In 2012, the South African government decided to terminate unilaterally bilateral investment treaties (BITs) with certain European Union members – including a co-signed agreement with Belgium and Luxembourg and individual agreements with Spain and Germany – and stated that it was planning to cancel further treaties in the future.  

To be sure, the government intends to cancel all BITs concluded with the entire EU trade bloc. It seeks to replace these with a new investment protection law grounded in South Africa’s domestic regulation rather than in international law.

The government believes the Promotion and Protection of Investment Act 2015 will afford South African policymakers greater policy space over what it considers to be restrictive and outdated bilateral treaties.  

The prospect of being hauled before the international court of arbitration over public policies (such as the Broad-Based Black Economic Empowerment and land redistribution policies) has prompted the government to use domestic legislative instruments rooted in South Africa’s Constitution. 

Settling disputes through international arbitration can be very costly, in addition to creating uncertainty around public policies designed for social redress.

Scathing response

The EU’s response to the cancellation of the BITs has been forthright and scathing. It is estimated that there are 3 000 international investment agreements in the world, with the EU accounting for nearly half of those. 

The EU has accused Pretoria of failing to provide sufficient opportunity for consultation or negotiation around the abolition of the treaties, as well as limited notice about their eventual termination.

Significantly, the elimination of the BITs has sparked fears within the EU that European investors will not enjoy sufficient protection in South Africa, notwithstanding the advent of the Promotion and Protection of Investment Act.

These fears have been driven out of concern that, in the absence of the BITs, the predictability of the framework governing trade and investment relations with South Africa will be undermined, and that investment costs in South Africa will rise.

Put simply, the EU regards the cancellation of the BITs as hostile and symptomatic of what it regards as ‘emerging protectionism’ in South Africa.

For its part, the South African government has retorted that the Constitution is the supreme law of the land and provides sufficient protection for foreign investors.

Heightened apprehensions

There are two experiences that heightened Pretoria’s apprehensions. 

The first concerned a Swiss private citizen who launched an arbitration claim against South Africa in 2001 under the terms of the Switzerland-RSA investment treaty, on the account that a farm they owned was vandalised, and that the state failed in its duty to provide protection and security.

In the second case, Italian investors who owned two granite mines in South Africa challenged the Mining Charter in 2007 for enforcing black economic empowerment regulations in the sector, a measure intended to correct past injustices.

They sued for $266m. According to the Organisation for Economic Co-operation and Development, the average legal and arbitration costs are in the region of $8m, and these could go up to $30m per claim. 

South Africa was acting in its own interest in order to preserve important public policy tools to address historical injustices.

Unjustified use

The costs involved did not justify the use of the arbitration instrument, especially in a country where the Constitution is the supreme law of the land.  

But this move clearly went counter to the commercial interests of the EU, and even the EU-RSA Strategic Partnership framework could not resolve such differences.

Interestingly, other European countries such as Poland have also mulled over the possibility of cancelling BITs with other EU members, citing high legal costs of settling state-investor disputes through international arbitration as a reason, as well as a concern that this reduces the country’s policy space to undertake certain economic measures. 

In terminating the BIT South Africa, therefore, exercised its sovereign power and interests, although this strained its economic relations with the EU.

The South African government has not taken EU criticism lightly.  

Pretoria has countered that the EU was made aware of the decision to terminate the existing BITs as early as 2011, when South Africa expressed a desire to re-negotiate the treaties with a view to enhancing economic transformation in the country. 

South African policymakers believed that the BITs were outdated and skewed in favour of foreign investors who can litigate against the state in international arbitration fora, while curtailing the government’s pursuit of domestic policy goals.    

South Africa has assured European investors that the abolition of the treaties will not affect the way that they are treated in South Africa.

A raft of measures

Indeed, South Africa has implemented a raft of measures since 1994 to protect investment, and is widely regarded as one of the world’s most open investment jurisdictions, with a favourable investment climate by international standards, not based on the BITs.

Unlike other countries such as the United States, Australia, Canada, France, China, and Russia – who either screen foreign investment using ‘national security’ criteria or designate certain sectors of the economy as ‘strategic’ and therefore off-limit to foreign investors – South Africa can hardly be described as having a protectionist investment regime.

The Competition Amendment Bill, introduced to the national Parliament in July 2018, provides for establishment of a committee appointed by the president (comprising cabinet members and other public officials) to have the power to screen investments by foreign firms for any potential national security threats that may arise during mergers and acquisitions.  

These amendments, however, constitute a marginal part of the mooted legislation and, contrary to legislation in other countries, are subject to parliamentary scrutiny.    

As such, the alarmism that has been triggered by the cancellation of BITs is not warranted.

Mills Soko is Associate Professor in International Political Economy at University of Cape Town Graduate School of Business

Mzukisi Qobo is Associate Professor in International Political Economy at the University of Johannesburg

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