Africa: Coming Back to Bite

Africa: Coming Back to Bite

By Adam Robert Green

5 March 2012

African governments once rushed into signing bilateral investment treaties to encourage FDI. Lawyers are now calling for new models.

With much of Africa’s investment coming from abroad, how governments manage complaints from foreign companies is a vital determinant of the business environment. For decades, foreign investors depended on diplomatic protection from home governments in their overseas adventures, which occasionally gave rise to "gunboat diplomacy". The US, for example, sent troops into Latin America 34 times to settle commercial disputes.

Since the 1960s, and spiking in the 1990s, a more formal investment approach was attempted in the form of bilateral investment treaties (BITs). These state-to-state agreements establish how governments handle investors from each other’s country, covering fair and equitable treatment, security, and compensation for expropriation, in assets but also, in some cases, in shares, stocks, bonds and other modalities. While BITs infringe sovereignty, in that disputes are settled in international tribunals and not domestic courts, many developing countries saw them as a way of signalling their attractiveness for foreign investment.

The number of treaties has grown exponentially, to around 2,500 today. The number of claims is growing too. Philip Morris, Total, Mobil, Shell, Siemens and Cargill have all taken states to arbitration, with Sri Lanka suffering the first award against a developing country in 1990. Twenty-six percent of new claims in 2010 had an African or Middle Eastern state party involved. In Africa, Zimbabwe, Tanzania, Namibia, Liberia, Algeria and Senegal have all faced actions. There are likely to be more disputes in areas such as mining, water and agriculture, according to Mahnaz Malik, an investment arbitration lawyer at the Chambers of Arthur Marriott QC at 12 Gray’s Inn Square. She warns that events such as the Arab Spring can generate a flood of claims.

But so far, South Africa is arguably the most prominent in the African context. Pretoria signed 30 BITs post-1994 to attract private investment. The new government had inherited a society that was among the most unequal in the world, where the vast majority of black South Africans had been excluded from meaningful economic activity under apartheid. As part of a set of initiatives to redress this inheritance and to meet the government’s constitutional obligation to create a more open and equitable society based on human rights, Black Economic Empowerment (BEE) programmes were initiated.

In 2007, a group of investors from Italy and Luxembourg filed a claim at the Convention of the International Centre for Settlement of Investment Disputes (Icsid), arguing that South Africa’s 2002 Minerals and Petroleum Resources Development Act (MPRDA) contained provisions that amounted to expropriation of their mineral rights, thus violating the BITs South Africa had signed with both countries. The MPRDA, a separate piece of legislation from BEE that aims to transform the minerals industry in South Africa, requires that holders of mineral rights undertake equity or equity-equivalent obligations; requirements emerging from consultations between the government and relevant parties, including representatives of the claimants. The South African government defended the MPRDA by arguing that it protected existing mineral rights and allowed for their uninterrupted use so long as companies also met the government’s wider transformational obligations in some accepted combination. In a punitive judgment, the Icsid tribunal dismissed the claimant’s case, ordered them to pay the legal costs of the South African government, and prevented claimants from bringing any such action again in future.

On the basis of similar reviews conducted internationally, notably, in the US, Norway, and certain Latin American states, South Africa launched a lengthy BIT review, the conclusion of which is that the country will not enter any new treaties unless there are "compelling economic reasons", says Xavier Carim, deputy director general of the international trade and economic development division of South Africa’s Department of Trade and Industry. "The very fact that narrow, shortsighted commercial interests can subject progressive and laudable government policies to international arbitration, the outcomes of which are unpredictable, creates unacceptable risks that can have a chilling impact on legitimate public policy making," he says, noting that there have been inconsistencies in the rulings taken by tribunals over similar cases.

It would be simplistic to characterise BITs as simply giving rise to clashes between progressive government policy and corporate interests. In some cases, such as a SOABI v. Senegal dispute, the problem was a largely technical disagreement over terms and conditions of a low cost housing programme.

In Zimbabwe, cases have been brought in objection to the ruling Zanu-PF party’s arbitrary and at times violent land reform programme. Broad and ambiguous terms have been a central problem of many agreements, says Jansen Calamita, senior research fellow in international trade and investment law at the British Institute of Comparative and International Law. "BITs are an agreement by the host state to accept the application of external standards to determine the legality of its actions - standards above and beyond the state’s constitution and national law. If the standards agreed are not clear - as they largely are not - it will be left to tribunals to give meaning and effect to those standards."

Push back

Some lawyers believe the first wave of BITs were signed too fast, with text penned by a closely-knit group of Western lawyers. The majority of BITs reflect the texts developed to promote the 1960s anti-communist, post-decolonisation protection agenda for European investors, says Ms Malik. She believes capacity to understand complex investment law issues is not always present in developing country negotiators. She notes that the imbalance becomes more acute as negotiations are often based on the developed country’s model. In a speech at the London School of Economics, Randall Williams of the South African Trade Department claimed to have seen negotiators making agreements without the presence of a lawyer.

Latin American governments have come out strongly in opposition to prevailing norms. In 2009, Ecuador’s vice minister of foreign affairs, Lautaro Pozo, said BITs reflected a "fifty year old ideology" and that many countries signed them without sufficient understanding of their implications. BITs did not, in his reckoning, reflect the objectives of developing states, especially on issues of the environment and human rights.

In one case, Philip Morris tried to sue Uruguay for copyright infringement when it ruled that cigarette packets needed to carry health warnings. Bolivian President Evo Morales claims that international arbitration offends state sovereignty, with Bolivia, Ecuador and most recently Venezuela denouncing Icsid, the Washington-based arbitration body, part of the World Bank Group, which settles nearly half of claims. India and Mexico have both refused to be party to the Icsid Convention, and Brazil has not ratified any BITs.

Others are more upbeat. "I think the backlash against investment treaties is overstated," says Anthony Sinclair, a partner at law firm Allen & Overy. "Countries continue to sign these treaties at a rate of about 50 a year." Mr Sinclair acknowledges there is "fine-tuning and recalibrating" of text, especially in terms of public interest regulation. "At the same time, countries are in search of growth, for which foreign investment is key."

There is no credible analysis proving the effect of BITs on investment, which would be very hard to quantify. Furthermore, BITs are not the sole determinant of investment. China is a prolific signatory, but continues to invest in countries without BITs - in contrast to Germany, where risk insurance is only issued to companies if they are operating in a country with a German treaty. Yet whenever governments and investors are discussing major cross-border investment, "everybody" on both sides is talking about investment treaties, Mr Sinclair claims.

The focus on treaties should not draw attention away from domestic reforms which could lessen the investment risk. Guinea-Bissau has undertaken domestic reform, turning a single court system dealing with everything from divorces to commercial disputes, into a more differentiated structure with commercial courts run by appropriately trained legal teams and judges, says Raimundo Pereira, speaker of the Parliament of Guinea-Bissau. Nonetheless, bilateral frameworks do appear to be of growing importance to investors.

Despite the frustrations, there is little that can be done about existing treaties until they expire, at which point clearer text can be negotiated, or countries can withdraw. Pulling out of active treaties altogether is unlikely. Even South Africa has not done so, given the diplomatic downsides. The goal of African legal teams is to improve the text in future agreements.

To date, many African governments employed international law firms to advise on treaties. While this helps buffet their expertise in negotiations, capacity-building of African government lawyers is needed. Rukia Baruti recently founded the African International Legal Awareness (Aila) programme, which in late 2011 organised a week long BIT training workshop. Participants included lawyers from Liberia, Ghana, Uganda, the Gambia, Egypt and South Africa. Baruti organised the workshop, held in London, after attending an investment conference in Mauritius, where many African attendees were unfamiliar with investment treaty arbitration.

"By building capacity and increasing awareness of the consequences of concluding investment treaties, African states will, before signing such treaties, carefully examine the meaning and consider the provisions. This would go a long way to avoiding disputes involving African states."

Mr Sinclair speaks approvingly of Aila, in which his firm participated. "There is no shortage of good will on the part of international lawyers to contribute on a pro bono basis. The issue is whether there are enough people with sufficient inspiration and energy, like Rukia, to organise these activities. Otherwise busy lawyers in firms or chambers, or in academic careers, may not be able to produce something like this themselves."

Aila has since been approached by African governments to deliver training in-country. Similarly, the International Institute for Sustainable Development has conducted training courses for African government officials in country and at a regional level.

It is important to note that while bilateral treaties have been overwhelmingly North-South in the past, that is changing in reflection of growing South-South economic interaction. Current BITs between developing countries include Mozambique-Indonesia, Djibouti-China and Eritrea-Uganda. South-South deals provide a platform to create more development-orientated texts, but often the European template is copied over. Regional treaties on the other hand tend to create more bespoke texts.

"I have found that debate is healthier in regional dynamics compared to a bilateral context," says Ms Malik. A recent Comesa agreement treaty contains more nuanced obligations than those found typically in bilateral treaties, she claims, including provisions to allow tribunals to take greater account of the development status of the host state. The Comesa treaty also omitted the full protection and security standard, a controversial feature in many BITs which puts hefty responsibilities on states. Algeria was taken to tribunal to pay damages related to civil unrest during the civil war. Similarly, Congo faced a claim for riots on the streets of Kinshasa.

The Comesa treaty, and new model texts, exhibit the potential for designing modern templates, says Ms Malik. "It shows African countries that they are not tied to the old European model. It paves the way for innovation in terms of making the treaties better balanced."