Ending treaties will hit investor confidence

Expiry of protection agreements makes capital-raising more difficult, writes Mark Allix

LAW firm Webber Wentzel points to a possible “further blow” to investor confidence in SA after Moody’s downgraded the country’s sovereign credit rating last week, and following yesterday’s cut for 12 local governments and Eskom.

Moody’s says the government’s announcing its intention not to renew numerous bilateral investment treaties with European Union (EU) member states may leave foreign investors with less protection against measures taken to nationalise SA’s resources.

The government indicated last month its intention to terminate a bilateral investment treaty with the Belgo-Luxembourg Economic Union when its 10-year term expires on March 13 next year.

It also announced its intention not to renew 12 other “firstgeneration” bilateral investment treaties entered into with other EU states after 1994.

Bilateral investment treaties are binding treaties between two states under which each undertakes to accord fair, equitable and non-discriminatory treatment to investments of nationals of the other.

Webber Wentzel says existing investments enjoy a 10-year sunset period of investor protections, but investments made after the date of termination will not receive these.

The decision to cease the renewal of the bilateral investment treaties follows a policy framework review conducted by the Department of Trade and Industry in mid2009. It concluded that SA’s firstgeneration bilateral investment treaties favoured investors, and “pose a risk and limitation on the ability of the government to pursue its constitutional-based transformation agenda”.

The firm says the new approach may be contrary to SA’s obligations under article 52 of the 1999 Trade Development and Co-operation Agreement with the EU. This sets out improved conditions for investment protection, investment promotion, transfer of capital and “the exchange of information on investment opportunities”.

“It refers to the fact that the first-generation bilateral investment treaties did not allow the South African government room to pursue policies in terms of which South African nationals, for political or economic reasons, received exclusive treatment,” Webber Wentzel says.

An example of such a policy is black economic (BEE), it says. “The government, in its negotiation of these bilateral investment treaties, failed to include such exceptions to its obligations, among others, to accord foreign investments fair and equitable treatment and not to discriminate against foreign investors or investments. Thus when the government implemented its BEE policy, it took the risk that foreign investors might challenge it as a breach of a relevant bilateral investment treaty.” Webber Wentzel also says resource nationalism is cited as the number one business risk facing mining and metals investors in a recent Ernst & Young study on business risks facing mining and metals globally.

EU officials and business leaders have said bilateral investment treaties were essential to obtaining affordable insurance that may be required to raise capital for investments. The bloc is by far the biggest investor in SA. EU Trade Commissioner Karel de Gucht was recently quoted as saying he was “disappointed” by the move and that it would “certainly affect the investment climate”.

Moody’s says the government had “diminished capacity” to deal with political and economic challenges, especially after the

empowerment Marikana killings and subsequent mining strikes. It says this would hamper the implementation of strategies that could place the economy on a path to faster and more inclusive growth.

The downgrade stung the Treasury, which responded that the core of SA’s policies remain “stable and predictable”. The Treasury says some of the drivers of the downgrade had their roots in the protracted crisis in the eurozone, which as an entity remained SA’s most significant trading partner.

“Government remains committed to … investment in infrastructure to increase the capacity of our networks; strengthening our fiscal buffers by reducing the deficit and stabilising our debt … (and) instituting a range of measures to improve the competitiveness of the manufacturing sector,” it says.

This included “redirecting” SA’s exports to destinations that showed “more resilience”, such as the rest of Africa, China and East Asia.

However, in June, news agency Reuters quoted Roeland van de Geer, head of the EU delegation to SA, as saying the African National Congress was walking a “precarious path” if it pursued policies shunning the West in favour of fellow Brics members India and China to fund its development.