Financial Gazette | Thursday, 17 September 2009

Zim-SA bilateral agreement doomed

– State parties grapple with wording
– Several investors stay on the fence

Munyaradzi Mugowo, Staff Reporter

THE Bilateral Investment Promotion and Protection Agreement (BIPPA) between Zimbabwe and South Africa, initially scheduled for signing in April and later deferred to June, is headed for total collapse as the two parties have failed to agree on the wording of Article 11 of the agreement.

It appears highly improbable that the two neighbours will ever harmonise their mutually exclusive goals of protecting new and previous investments from expropriation or nationalisation, on one hand, and fortressing the fast-track land reform and its gains, on the other.

The draft agreement has since been returned from the Cabinet committee on legislation for revision after Justice Minister, Patrick Chinamasa, and Sate attorney, Johannes Tomana, objected to Article 11, which relates to the nature of investments to be covered by the treaty, the scope of investment disputes and the most suitable dispute settlement mechanism in the event of a violation.

South Africa insists on a bilateral investment treaty (BIT) that also covers land investments made prior to the fast-track land reform of 2000-02 and removes both investment regulation and arbitration from the control of the government of Zimba-bwe, a proposal opposed by the host government.

The impasse has left Finance Minister, Tendai Biti, Economic Planning and Inve-stment Promotion Minister, Elton Mangoma, and Deputy Attorney-General, Prince Machaya — the three officials currently driving the initiative — in quandary over the most neutral phrase that adequately addresses the concerns of both parties.

Typically, BITs are shaped to provide non-discriminatory space of foreign investors, protection of investments from expropriation and nationalisation and the setting up of a tribunal for dispute settlement for state-to-state and investor-to-state cases.

Formal negotiations by officials from the two countries started in December 2003 and by 2006, an initial text had been drafted, but progress stalled over the interpretation and application of the substantive provisions of Article 11.

The contentions article reads as follows: “This agreement shall apply to all investments whether made before or after the entry into force of this agreement, but shall not apply to any dispute which arose before entry into force of this agreement.”

South Africa had acceded to the agreement after it was initiated in 2006, but Zimbabwe’s Ministry of Foreign Affairs objected saying the wording of Article 11 was too general and tended to cover a broad range of investments, which would complicate its interpretation or application to real investment situations.

This, the ministry said, could also increase the chances of an investment dispute arising from such overarching provisions as it leaves room for new disputes to be lodged in terms of the BIT.

To align the agreement to the Constitution of Zimbabwe Amendment Number 17 and 18, dealing with the land reform, Zimbabwe, in 2007 then proposed to rephrase the article to exclude investments related to agricultural land and put forward its proposed am-endment as follows: “This agreement shall apply to all investments whether made before or after its entry into force of this agreement, but shall not apply to investments relating to agricultural land.”

The objective was two-pronged — to avoid provisions that could put the country at the risk of being sued by South Africa for farms that were affected by the land reform and to reconcile the clause and the whole BIPPA to the constitutional Amendments numbers 17 and 18, which outlaw any dispute over land acquired by the State.

The amendments stipulate that investors will only be compensated “for improv-ements on the land”, not for the land itself.

But South Africa, in the same year, objected to the exclusion of land investments and stuck to the initial wording agreed by negotiators.

The closest the two parties came to a compromise was on March 20 this year when negotiators made the following proposal: “Subject to the domestic laws applicable in the territory of the party where the investment is made, this agreement shall, after its entry into force, apply to all investments made by investors of one of the parties in the territory of the other party.”

The amendment was later rejected by South Africa’s chief state law advisor who argued that subjecting investments to domestic laws, which can be changed, particularly when governments change, would invoke unwarranted uncertainty to investments made under the agreement.

The pressure to conclude the agreement intensified this year after the formation of the inclusive government and the country’s changeover to a multi-currency system in February and the consequent problems with working and investment capital, which forced the government to turn to private capital for solace.

A number of companies from the agriculture, mining, construction, financial and pharmaceutical sectors of Africa’s largest economy, notably, Nedbank, Aspen Pharmacare, Netcare, African Rainbow Minerals and FirstRand, have indicated strong intentions to move into Zimbabwe once the BIPPA is signed.

As a result, a series of meetings to the conclude BIPPA took place from March to July, but no wording so far has managed to break the deadlock in negotiations that now include Zimbabwe’s deputy State attorney and South Africa’s chief state law advisor.

Some analysts say the importance of the Zimbabwe-South Africa BIPPA has been exaggerated, especially considering its potential to spark unending land disputes, on one hand, and its questionable benefit for Zimbabwe given other conditions under which new investments will take place, on the other.

Besides, research has also shown that the correlation between foreign direct investment (FDI) and BIT is weak, as investments can still take place even where there are no investment protection treaties for as long as domestic laws are sufficiently strong enough.

Strong institutions, a stable business environment, efficient infrastructure and social services, quality of labour and easy access to markets and the existence of bilateral trade agreements or membership to multilateral trade institutions, have been found to determine variations in FDI among countries than BIPPA.

It is also interesting as well to note that the phrases “all investments” (and, implicitly, their protection) and “dispute” have appeared more frequently in both texts and in the discussions for the Zimbabwe-South Africa BIT than economic growth or development.

Luke Peterson, a development researcher with the International Institute for Sustainable Development, says the growing incidences of investment disputes emanating from vague and over-generalised BIT provisions globally, have induced governments to word their commitments with caution.

“Investment treaties have been crafted in deliberately vague language, often to cover the broadest range of investment situations. Only with the recent surge in interest in these treaties, and their invocation in legal disputes, have tribunals started to put flesh upon treaty provisions,” Peterson said.

“Although dozens of tribunals are now grappling with cases arising out of BITs and the North American Free Trade Area, the full policy implications of most treaty provisions still remain unclear.”

The largest disadvantage of a BIT for a host government is that, upon its promulgation, it forfeits the State’s right to regulate investments for development or in the public interest.