Business Day | 05 February 2014,
Stir over end to trade deals fades
by Amanda Visser
A STIR greeted last year’s announcement by the government that it would not be renegotiating bilateral investment agreements with major trading partners such as the European Union (EU).
However, it now seems as if a lot of dust has settled around the Promotion and Protection of Investment Bill, which is set to replace the agreements.
Some commentators are even venturing the opinion that the bill may be more beneficial for foreign direct investment than the investment treaties.
Even Trade and Industry Minister Rob Davies hinted as such earlier this week.
He said the EU, which was originally scathing about South Africa’s unilateral decision to ditch bilateral investment treaties it had agreed with member states, is now supportive of a key provision in the state’s proposed Investment Promotion and Protection Bill.
According to Mr Davies, the European Commission, in seemingly taking a leaf from the likes of South Africa, is pushing to include strict constraints on investors’ ability to take legal action against governments as part of a new trans-atlantic trade deal.
The commission is consulting with member states about this to prevent legitimate government policies being held hostage by specific interest through a treaty, said Mr Davies.
Grant Herholdt, a director at law firm Edward Nathan Sonnenbergs, says only four out of South Africa’s top 10 trading partners have bilateral investment agreements with South Africa.
"The investment bill will be welcomed by all other investors who are not currently protected under an investment treaty.
It represents an ‘open-door’ policy to trade in South Africa, welcoming all investors, not just a select few," he says.
Internationally there are about 3,200 investment treaties in existence, with half of them up for review by 2018.
Many bilateral treaties were concluded in the 1990s as both developed and developing countries sought to lessen the risk and reap cross-border investment benefits.
However, Christian Vidal-Leon, former legal officer at the directorate-general for trade of the European Commission and now manager at PwC in South Africa, says that there has been "a lot of disenchantment and dissatisfaction with the agreements, not only in South Africa but also in most developing countries."
Mr Vidal-Leon, who also served as a legal affairs officer at the appellate body of the World Trade Organisation (WTO), says that South Africa is probably the first country to "massively" pull out of the agreements.
Other countries have already rejected the jurisdictions of the international tribunals set up to arbitrate on disputes between investors and governments.
"South Africa is acting — to a certain degree — very responsibly, because it terminated the agreements but it is seeking to enact the Promotion and Protection of Investment Bill."
There are countries who terminated the agreements without offering any future protection.
Criticism levelled against the bill is the perceived lowering of the standards of protection.
But Mr Vidal-Leon says all the agreements have a "survival clause", which means that after termination, existing investments will still be protected by the provisions of the agreements for several years — anything between 10 years in the case of Belgium and Spain, and 20 years in the UK.
However, there has been some debate over the validity of this clause. Despite the changes in South Africa, Mr Vidal-Leon does not foresee a major change in investment behaviour, unless government misuses the provisions in the act once the bill is enacted.
"Investors will go where the money is. The risk will determine if they go or stay, not some government to government agreement. It does help, but it is not the determining factor."
Trade Law Chambers director Rian Geldenhuys says the first change proposed by the Promotion and Protection of Investment Bill, which was published in November last year, is that investors no longer have recourse to international arbitration to settle disputes against governments where there has been an alleged breach of their investment security.
Mr Herholdt says international investment arbitration is "fraught with risk". The process, which is often done under the auspices of the International Centre for Settlement of Investment Disputes (ICSID) is sometimes criticised for the inconsistency of the decisions reached.
Mr Geldenhuys says another change contained in the Promotion and Protection of Investment Bill relates to compensation in the event of expropriation. In terms of the bill this must be "fair and equitable" — this seems to be a lesser provision than under the treaties which provided for full market value.
However, Mr Herholdt says investors can take some comfort in that South Africa’s courts — when considering the application of legislation such as the proposed investment bill — will have to take account of the constitution, international law and any relevant convention or international agreement that South Africa is, or will be, party to.
Further, even though the bill, once enacted, will be breaking new ground,, much guidance has been derived from global forums such as the WTO and ICSID.
"Our courts are still viewed as independent and robust, where some decisions have favoured government and others did not.
"The main issue with the act is to create a balance between the protection of investor rights and legitimate government interests," says Mr Herholdt.
With Linda Ensor