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Move to ease German, EU doubts over investor risk in SA

Business Day | 30 August 2013

Move to ease German, EU doubts over investor risk in SA

by Linda Ensor

SOUTH Africa is scrambling to convince Germany and its other European trade partners that its unilateral scrapping of bilateral investment treaties is not a risk to their investments in South Africa.

It emerged on Thursday that the Department of Trade and Industry is now in talks with the Europeans, after earlier attempts to offer reassurance fell flat.

Germany is a big investor in South Africa, especially in the motor industry, and a major trade partner.

Unmoved by assurances from Trade and Industry Minister Rob Davies that South Africa’s widely criticised move does not endanger German investments, the German government is resisting it.

The department on Thursday denied the talks signified a "rethink" on the thorny issue.

South Africa initiated a review of the treaties in 2011, after a long-running court battle with Italian investors over black economic empowerment requirements.

At the time, Mr Davies said that if investors stayed away "because they feel that we don’t have old-style, dated, antiquated bilateral investment treaties in place, I can assure you there are plenty of others from other parts of the world who are happy to come and don’t insist on this".

"And, if they want to make that decision (to stay away from South Africa), well, they’ll be keeping themselves out of an economy which is part of a growing continent and that’s their choice."

South Africa argues other legislation offers significant protection and certainty to investors, and that separate deals are not necessary.

Southern Africa-German Chamber of Commerce and Industry CE Matthias Boddenberg said on Thursday the South Africa-German treaty had been at the core of the "success story" of German investment in South Africa, which amounts to about R81bn. "German companies put great stock in the existence of such treaties — not least because German state investment guarantees are … tied to the existence of such a bilateral treaty.

"The chamber is firmly convinced that the existing bilateral investment treaty between South Africa and Germany has created a safe investment environment for investors from both countries."

South Africa’s talks with European Union (EU) governments come in the wake of a tongue-lashing by European commissioner for trade Karel de Gucht last month at a South Africa-EU business forum.

He lambasted South Africa’s "unilateral" move as "bad policy", which he said would lead to an "uncertain framework".

Mr de Gucht noted that the EU accounted for 88% of investment stock in South Africa in 2010.

South Africa announced last year that the bilateral treaties with Belgium, Luxembourg and Spain would be terminated when they expired, in Spain’s case in December. It also said it planned to cancel treaties with another 11 other EU member states so that it could enhance economic transformation.

The department’s deputy director-general for international trade, Xavier Carim, stressed that the negotiations with EU countries did not signify a rethink on South Africa’s part.

South Africa wanted to "explain, consult and clarify as much as possible before we terminate the treaties", Mr Carim said.

"Germany is obviously an important investor in South Africa so we need to consult with them, but there are others that we have been consulting with as well. That is the reason why it has taken this long."

Even though the treaty with Germany has extended beyond the 10-year mark and can be terminated at any time by either party, this has not taken place.

Mr Carim denied this was because of nervousness about the consequences of such a move. The reason for the "delay" in dealing with the treaty with Germany was that it did not provide for automatic renewal on the termination date, whereas others did.

Mr Carim said South Africa, like many other countries, wanted to move away from bilateral investment treaties for reasons including that they had been drafted imprecisely.

These agreements left a wide scope for different interpretations in the event of a challenge on what constituted expropriation. Neither did they provide clarity on what should happen in the event of a dispute over what compensation should be paid out.

Mr Carim said these gaps created a lot of uncertainty and risk. He pointed out that the provisions of the German treaty would apply to existing investments for about 15-20 years after its termination.

South Africa was willing to discuss an investment protection mechanism at the level of the EU.

Mr Carim said government departments were also discussing a new draft Foreign Investments Bill — which first came to light during a parliamentary briefing in February — that was intended to replace the bilateral investment treaties.

Among other things, the investment bill would seek to clarify the level of protection to be offered to investors and deal with matters of compensation in the event of expropriation.

 source: Business Day