Global Justice Now | 26 February 2022
Corporate courts can be beaten. It’s essential for climate justice
By: Rob Davies
It is perfectly possible to withdraw from trade deals containing corporate courts, as former South African trade minister Rob Davies explains.
Let me say that I do agree with the premise of this panel that this broken ISDS system could have a detrimental effect on a just transition to a low-carbon economy, even though I have to say that I don’t think that I’m aware of any particular experiences in South Africa of challenges particularly to climate change legislation. So I’m going to speak more generally.
South Africa as you all know was a pariah state under apartheid, and was excluded from a huge range of international economic arrangements that were in force in the world. In the immediate aftermath of our democratic transition we were bombarded with pressure to sign a host of bilateral investment treaties in the name of attracting foreign direct investment. So we signed many of these things. And at one stage it almost became a routine matter of any engagement with a foreign government that you signed a double taxation agreement and a bilateral investment treaty. After some time we looked at these things and had a review of them, and that review was the basis of the decisions which we took during my time as the minister.
The BITs that we signed were based on the then prevailing model which was the so-called OECD model, which provided for an expansive definition of the investments that were going to be protected, of both direct and indirect expropriation – so indirect appropriation was change in public policy which would undermine the expectation of profits. There would be expectations of fair market compensation, and then of course the right of the investor to take the state to the international tribunals.
We saw also over time that there was an expansion in this increasingly litigious system. So that in 1996 the number of cases that went to the International Centre for the Settlement of Investment Disputes was 38. By 2018 it had risen to 706. The average cost of litigation – and it has to be stated in foreign currency – was US$8 million, and the average award in case of an adverse ruling was about $500 million. So this was an expensive system.
One of the first conclusions that we drew was that there was absolutely no correlation whatsoever in whether you had a BIT with a particular country and whether there’s any flow of FDI, even taking into account that the definition of FDI includes mergers and acquisitions, it’s not just green fields opening up of productive enterprises. For example South Africa never had a BIT with the US or Japan, but had quite significant investments from those two countries. In the case of many of the countries that we signed BITs with, we found no significant increase in any investment from those countries.
We were also seeing the kinds of public policy issues that were being challenged. One that particularly struck us was the tobacco company case targeting Uruguay. That was a very serious wake-up call to us. We had perhaps less dramatic experiences ourselves, but they were fairly significant. We had an Italian company that wanted to challenge the change to the mining licence regime which was going to provide for some kind of empowerment of historically disadvantaged people and communities as a condition for a mining licence. This was going to be challenged and in fact the litigation began in one of these tribunals. We had another company that was a victim of crime which was going to sue the government. In other words the government was going to be an insurance company providing protection against any kind of crime. And then we even had an individual who bought shares in our reserve bank – we still have private shareholders in the reserve bank – and wanted to cash out and claimed that he ought to have a share of the reserves of the country which had been built up at that particular moment. And he threatened to go to the system, even though his own government Germany was not in favour of it. This was the situation that we faced.
We had a very immediate challenge. By 2012 many of these BITs that had been signed in the period immediately after our democratic transition came up for renewal. It was either that you gave notice to lapse them or they were automatically renewed for another 10 or 15 years depending on the treaty concerned. At the end of the day we decided we had no option other than to take the decision to lapse them. And that of course is something that created enormous friction and an enormous backlash. Lots of suggestions that foreign investors were going to walk away, that we were going to face Armageddon if we did this. We had this pressure from the Europe Union, the European Commission at the time was really cheerleading a chorus of voices to tell us that this was a really bad thing to do. But in fact when we did this we found there was no real reaction of real foreign investors. In fact the very month that we lapsed the agreement with Germany, Mercedes-Benz announced the largest single investment in the motor sector in South Africa.
I think this points to something that is really significant and that is that foreign investors probably look at the concrete opportunities there are on the ground rather than the levels of protection that you offer them. And those that use the system are often not the mainstream investors that you want to encourage in the first place, but they are peripheral interest groups that are trying to seek some particular vested interest over and above public policy.
The other thing that we did was we introduced our own protection of investment law, in which we specifically indicated that there was a right to public policy, a right to regulate, in which we provided protection against expropriation according to the constitution of the country. We said on things like national treatment that there would be guarantees of treatment no worse than that which would be accorded to South African companies in like circumstances. Because that became an issue that some companies were beginning to say, well if you have black economic empowerment, or the state gives a particular incentive to some public corporation or something, we must get the same, and use national treatment as a claim for that. So we clarified on that. We introduced a system of mediation as a first step. We said of course one of the advantages of a law of general application that applied to everybody whether there was a BIT there before or not was that you had to exhaust the domestic judicial processes. We did in the end agree to international arbitration but only on a state to state basis.
So that’s what we did and I think in a way we showed that you can walk away from this system without Armageddon, without the world coming down on you. Although I need to say that I am told – and I haven’t been in government for two years now – that there is still huge pressure from different quarters saying the same old refrain that we’ve always heard: if you sign a BIT with us of the sort that we have been walking away from there is this packet of money that is available for investment.
This transition to a lower-carbon economy is something that is going to require an enormous amount of work to achieve a just transition. In our own country in South Africa where we’ve got a significant coal industry still, the Paris commitments (which have actually been upped in the Glasgow meeting) it was estimated would result in a decommissioning of assets – and that’s not even talking about jobs lost or communities affected – equivalent to about 60% of the GDP of the country in a single year. So this will be a very significant transition, and in order to ensure that it is a just transition we need to ensure that public policy and public regulation can act in the general interest of communities and peoples as well as in the interest of making our common but differentiated contribution to averting catastrophic climate change – which by the way was not caused by peoples in the South but by countries of the North. But making that contribution we can’t have this impeded by the claims and interests of really quite speculative and vested interests who are acting to put their own claims and gains above those of public policy and the public good, which I think is the essence of the ISDS system.
So I think this ought to be a moment when we look at a range of laws and regulations, I would say there need to be trade laws, we need to be looking an intellectual property laws and all sorts of other things, which I think need to be rebalanced as the world goes through something which I think ought to be in the order of a global green new deal.
Rob Davies was South Africa’s minister of trade and industry from 2009 to 2019. This article is based on a talk he gave to a webinar on corporate courts at the COP26 People’s Summit in November. Watch more at: www.globaljustice.org.uk/7nov-webinar