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New statism: what replaces canned investment treaties?

Business Day | December 04 2012

New statism: what replaces canned investment treaties?

by Peter Leon

AS SOUTH Africa’s attention remains focused on the unfolding Marikana inquiry, as much as the final run-up to the African National Congress’s (ANC’s) elective conference, little attention has been paid to an event that threatens to upend SA’s relationship with the European Union (EU). On September 7, SA gave unilateral notice to Belgium and Luxembourg that it will terminate its bilateral investment treaty on its 10th anniversary on March 13. At the same time, the government gave notice to the EU that all 12 of its remaining bilateral investment treaties with EU members would be terminated on their termination dates.

SA’s notice of termination came less than a month after the August 16 Marikana shootings and amid the country’s worst labour unrest in a generation, which, according to the Treasury, has resulted in more than R10bn in lost production. It also occurred at a time of an unsustainable 6.4% current account deficit in September, the highest since the onset of the global financial crisis in 2008, a 5.6% budget deficit, two sovereign rating downgrades by Standard & Poor’s and Moody’s — the country’s first since 1994 — and a 46.3% decline in year-on-year foreign direct investment, coupled with record levels of unemployment.

The EU is by far SA’s biggest investor, responsible for 88% of its foreign direct investment. It is also SA’s largest trading partner, accountable for a third of the country’s global trade. Under the 1999 EU-SA trade, development and co-operation agreement, negotiated by Thabo Mbeki’s administration, 90% of all EU-SA trade was fully liberalised this year under an asymmetric tariff phase-down arrangement. SA’s treaties with the EU were likewise negotiated and ratified during the Nelson Mandela and Mbeki administrations, both of which embarked on a programme of sweeping trade liberalisation to open up an ossified apartheid-era economy.

In an address to Wits University’s Mandela Institute at the end of July, Trade and Industry Minister Rob Davies foreshadowed some of these developments. According to Davies, the state should play a greater role in economic development. A Department of Trade and Industry review of SA’s existing treaties had concluded in 2010 that, as the relationship between the treaties and foreign direct investment was, at best, "ambiguous", the treaties themselves posed "risks and limitations" on the government to pursue its "transformation agenda". Investor-state arbitration could "open the door" to "narrow commercial interests" to subject matters of "vital national interest" to "unpredictable" international arbitration.

Accordingly, the Cabinet resolved in April 2010 that SA should refrain from entering into any future treaties "except in cases of compelling economic and political circumstances". Moreover, all "first-generation" treaties, entered into after 1994, should be reviewed "with a view to their termination and possible renegotiation on the basis of a new model … to be developed". A contemporaneous Department of Trade and Industry policy statement confirmed this, emphasising the importance of the government retaining "policy space" to implement "legitimate public policy objectives".

The policy statement went further, announcing that, in view of the "excellence" of the country’s judiciary, all future international investment disputes with SA would be domesticated under a new International Investment Act. SA’s treaty partners would, however, be offered an opportunity "to renegotiate the terms of (their) treaties".

Notwithstanding the promise to renegotiate, the Belgium-Luxembourg treaty was terminated unilaterally in the absence of either any new Investment Act or a new treaty model, causing EU Trade Commissioner Karel de Gucht to express his disappointment at the recent annual EU-SA investment summit in Brussels.

Although it is legitimate for SA to demarcate its public policy space on such treaties, whether for transformational or other reasons, what is remarkable about the department’s move against the EU is the lack of bilateral consultation as much as the proposal, almost novel in international investment law, that all future investment arbitration with SA should be domesticated. A key feature of international investment law is the existence of a neutral dispute resolution forum through international arbitration before an independent tribunal.

Why is all this a concern? These are binding international treaties between two states under which each undertakes certain reciprocal obligations in respect of any investments made by nationals of the other state within its territory. They oblige each country to provide "favourable conditions" for investments and accord fair, equitable and nondiscriminatory treatment to investments of nationals of the other state.

In addition, such investments are protected from unlawful expropriation or nationalisation, which must not only be for a public purpose, but compensated at full market value ("prompt, adequate and effective"). By contrast, section 25(3) of the constitution, while mandating compensation for the expropriation of property, requires this only to be "just and equitable", yet having regard to a host of factors, which can detract substantially from full market value.

The unilateral termination of the treaty with Belgium and Luxembourg may be connected with the governing party’s research report on state intervention in the minerals sector, which, while rejecting wholesale nationalisation, proposed an array of interventionist measures for the mining industry, including a 50% resource rent tax, strategic nationalisation, compulsory supply of minerals for local beneficiation and export duties, as an apparent palliative to outright nationalisation.

By reverting to its 1992 "ready to govern" mantra, the ANC’s June policy conference downplayed the minerals report by adopting the principle of strategic nationalisation, where deemed appropriate, "on the balance of evidence", while rejecting wholesale nationalisation. Although it remains to be seen how all this will play out at Mangaung this month, if any of these proposals, not least those relating to strategic nationalisation, were to be implemented, they would have serious implications for SA’s treaties.

According to the department, its treaty review does not introduce any "new obstacles" to investment and ensures that SA "remains open to foreign investment", while providing the requisite "security and protection" for foreign investors. The evidence, so far, does not accord with this. Notwithstanding the department’s undertaking to renegotiate treaties as they come up for renewal, the Belgium-Luxembourg treaty was terminated unilaterally, with no proposed substitution. Likewise, there is no sign of any new Investment Act, let alone a treaty model with which EU states can engage.

Marikana — as much as the ratings downgrades that followed in its wake — should have persuaded the government of the importance of assuaging fragile investor confidence. Hopefully, as we hurtle towards Mangaung, the delegates will be reminded of Mandela’s remarks to his biographer, Anthony Sampson: "(Davos) changed my views altogether. I came home to say: ‘Chaps, we have to choose. We either keep nationalisation and get no investment, or we modify our own attitude and get investment.’"

• Leon is partner and head of Africa mining and energy projects at Webber Wentzel.

 source: Business Day