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Govt may face ‘claims worth billions’ from foreign firms

Engineering News (South Africa) | 6 Feb 08

Govt may face ‘claims worth billions’ from foreign firms

By: Olivia Spadavecchia

Foreign companies operating in South Africa that have lost production and ultimately profit as a result of the power supply crisis might be able to claim back their losses from the government, according to corporate law firm Werksmans.

The legal firm explained that foreign companies might have a legal right of recourse to the International Centre for the Settlement of Investment Disputes (ICSID) based in Washington, because of the government’s obligations under its bilateral investment treaties.

"The main thrust of the treaties is that the South African government undertakes to create ‘favourable conditions’ for the investments by foreign companies, and that there shall be no unfair discrimination. There is certainly an argument that the South African government has breached these obligations simply by failing to provide for increased power generation when it knew the country’s power generation could not keep pace with population and economic growth," Werksmans said in a statement.

And with the energy crisis touted to lower this year’s gross domestic product growth, there is potential for the State, as the sole shareholder of power utility Eskom, to be at risk of claims worth billions, it said.

After 1994, desperate for foreign investment, the government signed bilateral investment protection treaties with about 42 countries, with the objective of assuring foreign investors their investments would be protected and obliging the government to accept the jurisdiction of ICSID in the case of disputes between it and foreign investors from states, which are party to the ICSID Convention.

Werksmans noted the example of the bilateral agreement between South Africa and Canada, which is premised on promoting and protecting the investments of Canada in South Africa, and vice versa. It "encourages the creation of favourable conditions for investors of the other contracting party to make investments in its territory" and to accord those investments "full protection". The treaty also prohibits "unfair discrimination against foreign investors".

Director Roger Wakefield said that these provisions were found in many bilateral investment treaties, and warned that they could become the "source of arbitration proceedings in the light of recent embarrassing disclosures regarding the blackouts".

"More seriously, one could strongly argue that it is discrimination the fact that Eskom is still exporting large amounts of power to neighbouring countries when foreign-owned mining companies are having to shut down for lack of power," Wakefield added.

"Eskom’s continued exports when it can’t meet local demand, means it is discriminating against local industry. That’s a clear violation of the bilateral investment treaties. If this discrimination results in a financial loss - and this is evidently the case - then those foreign companies covered by bilateral agreements have the right to bypass local courts and seek redress from the ICSID," he concluded.

South Africa is not a signatory to ICSID, but Wakefield noted that this was not an obstacle, because of the fact that the various treaties specifically require the government to submit to the jurisdiction of ICSID.

 source: Engineering News