BIT between the teeth
Granite firms seek expropriation compensation
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?