In a possible further blow to investor confidence in South Africa, the South African government expressed its intention to terminate its bilateral investment treaty (BIT) with the Belgo-Luxembourg Economic Union on 7 September 2012.ą
In accordance with the notice, the BIT will terminate when its ten-year term expires on 13 March 2013. The South African government also announced its intention to not renew twelve other BITs it previously entered into with other European Union (EU) member states.
Under the BITs, existing investments enjoy a ten-year sunset period of protection, but any investments made after the date of termination will not receive any of the investor protections afforded by the BITs.
BITs are binding international treaties between two states under which each state undertakes certain reciprocal obligations in respect of any investments made by nationals of the other state within its territory. These treaties generally oblige each state party to accord fair, equitable and non-discriminatory treatment to investments of nationals of the other state.
Review of BITs
The decision to cease the renewal of the BITs between South Africa and EU member states is pursuant to the BIT policy framework review conducted by the Department of Trade and Industry (DTI) in June 2009 (the review).
The DTI concluded in the review that South Africa's BITs extend too far into the policy sphere, as the first generation of BITs, which the government entered into post-1994, were allegedly skewed towards investors. First-generation BITs apparently did not contain the necessary safeguards to preserve flexibility in a number of critical policy areas.
The DTI further observed in the review that BITs sometimes allowed the legal and business community to challenge regulatory changes, which the government considered to be in the public interest. The DTI accordingly recommended restructuring South Africa's BITs to ensure that the treaties are harmonious with the country's broader social and economic priorities.
On 26 July 2012 these concerns were reiterated by Minister of Trade and Industry, Rob Davies, at a United Nations Conference on Trade and Development (UNCTAD) event in Johannesburg. Dr Davies observed that the first-generation of BITs "pose a risk and limitation on the ability of the Government to pursue its Constitutional-based transformation agenda".
According to the Minister, the Cabinet endorsed the review's recommendations in April 2010 and decided to refrain from entering into any new BITs except in cases of "compelling economic and political circumstances". The government also undertook to review all first-generation BITs that are approaching their expiry date "with a view to termination, and possible renegotiation on the basis of a new Model BIT to be developed".
Dr Davies suggested that domestic legislation might replace BITs to appropriately balance investor protection with other public interest goals, including the promotion of development and historical redress. He was critical of international arbitration, which he considered unpredictable; implying that it impeded further governmental intervention in the economy.
Consequences: BITs and the mining sector
In the absence of BITs, international investors, not least in the mining sector, are likely to have significantly less protection against resource nationalist measures. Resource nationalism is cited as the number one business risk facing mining and metals investors in a recent Ernst & Young study on business risks facing mining and metals globally. ( Click here to download the study by Ernst & Young.)
Measures recently proposed by the ruling African National Congress Party (ANC) in a report on State Intervention in the Minerals Sector (the SIMS Report) include increased taxation, mandating the regulation of "strategic minerals" with regard to their beneficiation, exportation and sale, and the strategic nationalisation of mineral resources on the "balance of evidence". These proposals were endorsed at the party's national policy conference in June 2012.
Dr Davies also suggested a similar shift in economic policy in his speech, involving "state intervention in the form of regulations to balance the requirements of investors and the need to ensure that investments make a positive contribution to the sustainable development of the host state".
These proposed reforms may strip the mining industry of typical BIT obligations to accord "fair and equitable treatment" to investments. By discarding favourable conditions for investments, which BITs generally create, the reforms could have a significant impact on the sustainability of the mining industry by acting as an investment deterrent.
Other international obligations
South Africa's new approach may furthermore be contrary to its obligations under Article 52 of the 1999 Trade Development and Cooperation Agreement (TDCA) between South Africa and the EU.
Article 52 of the TDCA is aimed at the promotion and protection of investment and requires parties to the agreement to aim to establish a climate that favours and promotes mutually beneficial investment, both domestic and foreign. The TDCA is geared towards improved conditions for investment protection, investment promotion, transfer of capital and "the exchange of information on investment opportunities".
The review, as well as Dr Davies' remarks, makes it clear that the South African government intends to align the treatment of foreign investments in South Africa with the Constitution.
In the SIMS Report, the ANC proposes the nationalisation of "strategic" mineral resources. BITs oblige parties to ensure "prompt, adequate and effective compensation" in instances of lawful expropriation. The Constitution, on the other hand, requires standards of compensation different from and less generous than those under the BIT regime, and also requires consideration to be given to what is justifiable in an open and democratic society.
While BITs typically provide a mechanism for foreign investors to bypass domestic courts and to enforce the host state's BIT obligations in a neutral forum, usually by international arbitration, it is unlikely that investors will have the right to bypass the South African judicial system. In essence, this means less protection for investors against government measures that may amount to expropriation.
Global reactions to the decision
EU officials and business leaders have indicated their discontent with the government's decision. In a recent Business Day article,˛ EU Trade Commissioner, Karel de Gucht, was quoted as stating that he is "disappointed" by the move and that "[i]t will certainly affect the investment climate". European business leaders have stated that the existence of relevant BITs is essential to obtaining affordable insurance, which they may require to raise capital for investments.
The termination of BITs may have a potentially negative impact on already fragile investor confidence in the local mining sector ― and on South Africa's economy as a whole. And at a time when the long shadow of the infamous Marikana mine shootings and a plethora of on-going strikes still cloak the South African mining sector, the decision comes at a particularly inopportune moment.
1 The notice of termination was contained in a letter entitled, "Termination of the Bilateral Investment Treaty with the Belgo-Luxembourg Economic Union", from Maite Nkoana-Mashabane, Minister of International Relations and Co-operation, to the Ambassador of the Kingdom of Belgium to South Africa, Johan Maricou, on 7 September 2012.
2 J Marais, "South Africa, European Union lock horns", BDlive, 23 September 2012, available here.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.