Bilateral treaties are binned
These agreements have outlived their usefulness for SA, says minister
THE outcry over South Africa’s decision to start cancelling investment protection agreements may be misplaced as other legislation and regulations are far bigger hurdles to attracting investment, market commentators said.
Trade and Industry Minister Rob Davies said this week that the existence of bilateral investment treaties (BITs), entered into mainly in the early 1990s when the new democratic government sought to calm investor fears over the risk of nationalisation, had shown no correlation with foreign direct investment (FDI) flow.
The country had no treaties with countries like the US and Japan, both major sources of FDI in South Africa. But it did have treaties with countries that had barely invested in the country, Davies said.
FDI into South Africa has changed from an outflow of R1.4-billion in the second quarter last year to an inflow of R12.9-billion in this year’s first quarter, despite the big outcry over the cancellation of treaties.
“Experience over the world shows that BITs are not decisive in decisions to invest or not in any jurisdiction. Investors are primarily concerned with the level of returns to their investment, and whether or not they have access to an effective legal system and recourse to justice. South Africa has and continues to fare well on these counts,” Davies said.
Peter Montalto, analyst at Nomura, said the government’s notifications to date that it will cancel treaties with Belgium, Luxembourg, Spain, the Netherlands, Germany and Switzerland caused increased investor uncertainty and reputational damage to South Africa because of the way it was handled.
The government has indicated that it will terminate all treaties as they come up for renewal, but said existing investors will still enjoy protection under the treaties for sunset periods of up to 20 years.
Montalto said it would have been helpful if the proposed Promotion and Protection of Investment Bill, published for public comment last week, was in place before the notifications started.
“At the end of the day, there are many investments in South Africa not covered by bilateral treaties, but rely on the underlying constitutional framework.
‘‘A much greater roadblock for many investors will be competitive- ness, labour law and the cost of doing business — not the technicalities of the investment protections offered within the legal framework under the constitution.
‘‘Specific laws such as business registration, temporary worker rights and mining law amendments are of more interest and affect the value of business more,” Montalto said.
South Africa has been lagging many of its emerging market peers in attracting foreign investment, while low domestic savings rates have hampered local investment. A Goldman Sachs report released this week said the country needed foreign direct investment of $7.5-billion (R77billion) a year if it wanted to raise its growth rate to an average of 5% over the next 20 years. It had received on average $1.9-billion a year since 1994.
While South Africa was the first country to start revoking BITs in their entirety, other countries, including Australia and New Zealand, have begun to exclude certain problematic provisions in the treaties, said James Zhan, director of the Investment and Enterprise Division at the United Nations Conference on Trade and Development (Unctad).
This had been sparked in part by a rise in the number of disputes initiated by foreign investors invoking their rights under the treaties — from less than a dozen in the period between the 1970s and 1990s when the treaties mushroomed, to 58 cases lodged in 2012 alone, bringing the disputes total to 514, Zhan said.
Unctad has developed an investment policy framework to assist governments in rethinking their investment policies so as to balance the rights and responsibilities more equitably between investors and governments. “First-generation treaties date back to a time when treatymakers’ overarching objective was to attract foreign investment.
“The agreements were designed to be decidedly investor-friendly. This has created a situation where governments comply with obligations they have committed themselves to at a time when today’s new challenges [including rising youth unemployment, persistent poverty, food security concerns and stark and growing global income disparities] did not even exist.
“It is unsurprising, then, that many governments feel boxed in and lacking adequate legroom to formulate appropriate policies,” Zhan said.
Critics have expressed scepticism over the government’s true intentions regarding the cancellation of the treaties, which they say may be used to expropriate assets at less than market value to further policy goals such as black economic empowerment.
Montalto said: “We do not believe this law is geared towards any plans on land reform or mining licence seizures — even if both are on the policy agenda for different reasons over the medium run.”