BIT be­tween the teeth

Gran­ite firms seek ex­pro­pri­a­tion com­pen­sa­tion

Finweek English Edition - - Openers - BY STEPHEN MUL­HOL­LAND stephenm@fin­

MORE THAN 30 large cor­po­ra­tions have brought cases against Ar­gentina to the World Bank’s In­ter­na­tional Cen­tre for the Set­tle­ment of In­vest­ment Dis­putes (ICSID). Some have set­tled with the gov­ern­ment on var­i­ous terms but the bulk con­tin­ues to pur­sue com­pul­sory ar­bi­tra­tion through the ICSID.

They are to­gether claim­ing an es­ti­mated $16bn (R120bn) from the gov­ern­ment of Ar­gentina for losses in­curred as a re­sult of state ac­tion. Sev­eral cases have al­ready been won by the com­pa­nies with awards the equiv­a­lent of bil­lions of rand.

South Africa could well be the next Ar­gentina in the Bi­lat­eral In­vest­ment Treaty (BIT) arena. As has been re­ported, Ital­ian in­vestors in Marlin Hold­ings and Marlin Cor­po­ra­tion and RED Gran­iti SA (Pty) Lim­ited have suc­ceeded in their ap­pli­ca­tion to the ICSID for com­pul­sory in­ter­na­tional ar­bi­tra­tion against the SA Gov­ern­ment. Th­ese com­pa­nies are part of a group that dom­i­nates the SA gran­ite in­dus­try.

In a press re­lease, law firm Web­ber Wentzel Bowens, which rep­re­sents the gran­ite com­pa­nies, says the re­quest to the ICSID for ar­bi­tra­tion arises out of the May 2004 en­try into force of the SA Min­er­als and Pe­tro­leum Re­sources De­vel­op­ment Act, 2002 (the MPRDA), which placed pre­vi­ously pri­vately owned min­eral re­sources un­der “state cus­to­di­an­ship.”

Fur­ther, from 2009, in terms of the pro­posed Min­eral and Pe­tro­leum Roy­alty Bill, 2006, min­ing com­pa­nies will have to pay roy­al­ties on min­eral rights they pre­vi­ously owned.

In their re­quest, the com­pa­nies, which em­ploy 2 000 peo­ple in SA, of­fered a “com­pre­hen­sive state­ment of the in­vestors’ cur­rent and pro­jected losses aris­ing from this ex­pro­pri­a­tion, and re­lated dam­ages, amount­ing to some 266m euro (about R2,5bn).”

A num­ber of the com­pa­nies seek­ing dam­ages from Ar­gentina are util­i­ties. They in­vested in Ar­gentina on the ba­sis of a fixed, or pegged, ex­change rate be­tween the peso and the dol­lar. When in­ter­nal eco­nomic strains forced the gov­ern­ment to aban­don the dol­lar peg, the com­pa­nies were or­dered to re­tain their old peso rates for sup­ply­ing power. This was the ba­sis for their claims, sev­eral al­ready suc­cess­ful, against the Ar­gen­tine gov­ern­ment.

A le­gal def­i­ni­tion of a BIT is that “it’s an in­stru­ment of in­ter­na­tional law that pro­vides in­vestors with cer­tain pro­tec­tions in re­spect of their in­vest­ments in a for­eign state and in most cases a right to seek di­rect re­dress against gov­ern­men­tal ac­tion which causes them a loss.”

Among oth­ers, SA has BITs with Italy and the Belgo-Lux­em­bourg eco­nomic union. Marlin is part of the Lux­em­bourg in­cor­po­rated, but pri­vately held, Fin­stone S.a.r.l group, while RED Gran­iti is a sub­sidiary of RED Gran­iti Spa of Italy. Th­ese groups are global lead­ers in the sourc­ing, quar­ry­ing, mar­ket­ing and dis­tri­bu­tion of nat­u­ral stone for the con­struc­tion and monumental in­dus­tries, while Fin­stone has in­vested “heav­ily” in the lo­cal pro­cess­ing of nat­u­ral stone into fin­ished and semi-fin­ished prod­ucts.

Web­ber Wentzel Bowens states that un­der the BITs with Italy and the Bel­go­Lux­em­bourg union, its clients are en­ti­tled to “prompt, ad­e­quate and ef­fec­tive” com­pen­sa­tion for the ex­pro­pri­a­tion of their SA in­vest­ments. They also de­mand “fair and eq­ui­table” treat­ment by SA. They also claim that un­der the BITs they must have the “use and en­joy­ment” of their in­vest­ments and must not be sub­ject to “dis­crim­i­na­tory” mea­sures.

Ap­par­ently there have been ex­haus­tive ef­forts by the gran­ite com­pa­nies to ar­rive at a set­tle­ment with the SA Gov­ern­ment. Italy and Bel­gium have made diplo­matic ap­proaches but with­out suc­cess. It seems the approach to the World Bank’s ICSID is con­sid­ered a last re­sort by the com­pa­nies.

How­ever, there lurk here dan­gers for SA that Gov­ern­ment needs to con­sider very care­fully. It’s all very well for us to have what we call “fair” dis­crim­i­na­tion, but will our con­sti­tu­tional le­gal­i­ties carry any weight in an in­ter­na­tional le­gal fo­rum? Per­haps our Gov­ern­ment’s Black Eco­nomic Em­pow­er­ment poli­cies will be seen by an in­ter­na­tional tri­bunal as dis­crim­i­na­tory in terms of the BITs and there­fore il­le­gal.

The lawyers claim, on be­half of the gran­ite com­pa­nies, that the “Min­ing Char­ter dis­crim­i­nates against for­eign in­vestors in favour of His­tor­i­cally Dis­ad­van­taged South Africans and thus vi­o­lates the BITs’ eq­ui­table treat­ment re­quire­ments.” Now, the SA Gov­ern­ment will have to ad­mit that the char­ter does, in fact, dis­crim­i­nate in this man­ner be­cause it quite plainly does. But, SA will ar­gue, that this is “fair” dis­crim­i­na­tion given the evils of the past.

This ar­gu­ment will no doubt be sym­pa­thet­i­cally re­ceived by the ICSID panel, but the panel will be con­strained by its duty to ap­ply in­ter­na­tional law in which dis­crim­i­na­tion is dis­crim­i­na­tion is dis­crim­i­na­tion.

Ob­vi­ously, given our Pres­i­dent’s fond­ness for the world stage and our pride at “punch­ing above our weight” in world af­fairs, it would hardly be ap­pro­pri­ate for us to refuse to abide by a de­ci­sion of a World Bank body such the ICSID. It’s to be hoped that it isn’t too late for wiser heads in Gov­ern­ment to at­tempt to re­solve this mat­ter be­fore it goes be­fore a three-per­son ICSID panel within a cou­ple of months.

Let us hy­poth­e­sise that the gran­ite com­pa­nies win an award from the ICSID, which, given past ex­pe­ri­ence in the Ar­gentina mat­ters, might be less than asked for but still sub­stan­tial. Could this un­leash a wave of other claims based on BITs with other coun­tries? It’s to be borne in mind that it’s not only con­trol­ling share­hold­ers who can ap­peal to ICSID for com­pen­sa­tion. Mi­nori­ties can do so, too.

Fur­ther, com­pa­nies have a fidu­ciary re­spon­si­bil­ity to their share­hold­ers. Thus, if the gran­ite com­pa­nies are com­pen­sated, what ar­gu­ment can other multi­na­tional ex­ec­u­tives make not to take the same route? And what is to stop mil­i­tant mi­nor­ity share­hold­ers from em­bark­ing on class-ac­tion suits forc­ing for­eign com­pa­nies to sue the SA Gov­ern­ment for losses in­curred in abid­ing by char­ters and BEE leg­is­la­tion that are dis­crim­i­na­tory by na­ture?

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