Bilateral Investment Treaties review

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Trade and Industry

05 October 2009
Chairperson: Ms J Fubbs (ANC)
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Meeting Summary

The Department of Trade and Industry briefed the Committee on the history and status of Bilateral Investment Treaties. They were primarily instituted by developed countries that wished to protect the interests of their investors in the face of uncertain legal systems and the possibility of expropriation of their assets without sufficient compensation. South Africa was party to several treaties, predominantly with European and other African states. South Africa was now both an importer and exporter of capital and wished to review the terms of these treaties, also referred to as Investment Promotion and Protection Agreements, Bilateral Investment Promotion Agreements or Reciprocal Investment Promotion Agreements.

Members raised concerns over the perception of South Africa as a risky environment for investment. This was not as strongly held a perception now as it had been in the past. They stressed the need to have a balance between the interests of international investors and of the state, while also preserving the human rights of its citizens. The interests of investors was also a factor in agreements South Africa was reaching with other African states as South African investment into Africa increased.

The Committee tabled a proposal that Parliament must develop a greater knowledge of Bilateral Investment Treaties to strengthen its oversight role.

Meeting report

The Chairperson welcomed all present and took note of some apologies. International trade enjoyed a high priority as had been indicated at a workshop held by the Department of Trade and Industries (dti).

Ms Fubbs announced that she would be attending an international conference in Korea later that week. She said that their Committee had been instructed to attend because of the oversight role this Committee played in terms of the financial aspects of space exploration. It was an international event and South Africa would be the host of the next edition in 2011 and it was therefore necessary to observe proceedings.

Mr S Marais (DA) asked which Members of the Committee would be accompanying her, and on what basis they had been selected.

The Chairperson explained that the Committee would be attending three international events during the current financial year. She acknowledged the need to accommodate both the official opposition and other opposition parties. A more important meeting was scheduled with the European Union later in the financial year, where the DA’s presence would be required. She did not really want to go to Korea but was expected to do so by Parliament. Ms Lebuya (IFP) would accompany her, as she was available. There were meetings planned during the time of the conference in Korea with the National Lotteries Board and some Members of the Committee needed to attend these. It was not a dti matter. The decision had been taken at a higher level. A total of five Members of Parliament would attend the conference. She did not know who these would be. The Committee management had tried to maintain transparency in the selection process and she thought that the efforts had been successful.

Mr Marais said that his question was not about this particular trip but touched on the principle that all Members should enjoy the opportunities available. He agreed that management had acted in a transparent and constructive manner.

The Chairperson said that a decision had been taken to offer Members the opportunity to attend international events on a rotational basis. Task teams had been established within the Committee to deal with specific issues.

Bilateral Investment Treaty Policy Framework Review
briefing by the dti
Mr Xavier Carim (Deputy Director-General: International Trade and Economic Development Division (ITED) said that the dti had reviewed Investment Agreements. There were several considerations. South Africa did not as yet have a formal policy framework regarding such agreements. The historical background was that the country had signed several Bilateral Investment Agreements (BITs) in 1994 and 1995. These had been mainly with European countries. These were the standards for future agreements. By 2000 many of these BITs were no longer appropriate. There had to be a balance between protecting South Africa’s investments and the need for socio-economic development.

Mr Carim said that in 2002 the dti had started an investigation. Provisions were needed to ensure that the country’s policies could not be challenged. Some of the BITs were vulnerable to international challenges, particularly in respect of expropriation clauses. This was largely a multilateral process and important insights had been gained. There had been a flurry of disputes resulting from the financial crisis in the late 1990s and early 2000s. The dti realised that they needed to pay more attention to the substance of treaties. The most recent challenge it faced was from Italian investors.

Mr Carim said that the objective of the review was to provide a clear policy framework. Their focus was mostly on BITs but they were also concerned with regional and multilateral agreements. They had tried to ensure that a consultative process had been followed, which had been consistently applied to all negotiation. The Department’s political principals had signed off the review. It would serve as a legal background. An investigation was needed into the broader human rights issues. A balance had to be preserved between the interests of investors and state development programmes. On the one hand investment was needed into South Africa, while on the other hand South Africans were investing in African countries. A balance was needed. Future agreements should not undermine policies.

Ms Sureiya Adam (Director: Special Projects, ITED) said that the first BIT had been concluded fifty years previously between Germany and Pakistan. There had been very little activity in the following thirty years. The first dispute between an investor and the state had involved an agreement between Sri Lanka and the United Kingdom. There had since been a huge uptake in BITs. Most of these agreements were between developed and developing states. In the late 1990s there had been some BITs concluded between developed states. There were now some 2 600 BITs in force globally. Many of these agreements were based on the model provided by the Organisation for Economic Cooperation and Development (OECD).

Ms Adam said that as South Africa emerged from its international isolation, BITs had been seen as a useful tool to strengthen relations with other countries and as a tool to promote investment. South Africa’s first BIT was concluded with the United Kingdom. It had been negotiated earlier but was signed after 1994. Recently the impacts of BITs had become a reality. Certain provisions had become the subject of arbitration. Italian investors were currently challenging clauses of the Mineral and Petroleum Resources Development Act (MPRDA). There was a global concern that BITs tended to be one-sided. Many were under review. South Africa’s perspective was changing as the country was now both an importer and exporter of capital.

A BIT was an agreement between two states and they were also referred to as Investment Promotion and Protection Agreements, Bilateral Investment Promotion Agreements or Reciprocal Investment Promotion Agreements. Some did involve economic communities such as the Southern African Development Community (SADC) but were usually stand-alone agreements.

Ms Adam presented statistics on the number of BITs concluded by South Africa. There had been a spike in 1998. There had been concerns regarding developmental aspects. Currently South Africa had 43 BITs. Of these, 16 were with other African countries and 16 with European countries. There were two agreements with countries in Asia, five with countries in the Middle East and four with countries on the American continents.

Ms Adam described the structure of the review process. It started with a mandate to review BITs, identify the legal risks, develop a model BIT and finally to make recommendations to Cabinet. The methodology was to begin with a stock-take and assessment of existing BITs. There had been changes in staff at ITED and at the Department of International relations and Cooperation (DIRCO) (formerly the Department of Foreign Affairs (DFA)). This was then followed by macro and micro reviews. The macro review was conducted by means of a questionnaire to the various desk managers within the ITED, the DFA and the Presidency. The role of the DFA was important as many of the trade missions were drivers for the agreements. Interviews were also conducted. The micro review amounted to a legal analysis of the texts of BITs.

Ms Adam said that the information received from the review was that the first generation of BITs coincided with South Africa’s re-emergence into the global economy. BITs had been used as tools to promote investment. They were often concluded as part of state visits. There had been no clear policy. In terms of outward investment, there was a need to protect South African investors abroad. The outside world perceived Africa as being a risky environment for investment and a BIT was regarded as a mitigating factor. There was a need for a policy framework. Developing nations were relying increasingly on BITs between each other.

Ms Adam said that Latin America countries had denounced membership of trading blocs and BITs. Many had been significantly affected by international arbitration. Argentina was an example. Other cases had gone to the International Centre for the Settlement of Investment Disputes (ICSID). Developed nations were now also reviewing BITs. Norway had recently conducted a similar review. Public opinion was divided. Another factor was market size.

In many cases South Africans invested in African countries without realising that there was a BIT in place. They were usually only concerned with double tax agreements. Insufficient information was provided. External studies were needed. The Edge Institute had conducted a study and recommended that greater efforts must be made to collect data.

Ms Adam said that South Africa had no BIT with the United States of America. There was one with Canada but this had not yet come into force. There was no agreement with either Japan or India. Brazil was a country which was a significant recipient of foreign investment but had not concluded a single BIT.

She explained that the micro review had encompassed a study of the 11 standard clauses in BIT agreements. There were some problems with the text of treaties. The preambles of early BITs were largely standardised. The BITs did not address the host country’s standard of development. The preambles were becoming increasingly important as interpretation aids. BITs undertook to defend all investors. Definitions and clauses had to be modified to reflect the true intent. Two problematic clauses were those regarding National treatment and Most-Favoured Nation status. No measures had been included to deal with issues such as affirmative action and empowerment. This had been remedied in later BITs, such as the one concluded with Ethiopia in 2008. The playing fields needed to be levelled regarding Most Favoured Nation status.

Ms Adam said that the clause regarding expropriation should provide for “appropriate compensation” rather than “immediate, full and effective compensation”. The South African Constitution made provision for “just and fair compensation”. Public interest had to be considered. Investors were favoured in dispute resolution mechanisms. They could make claims against foreign states. This was very problematic. Investors could leapfrog domestic legal systems. The ICSID was a World Bank institution. South Africa was not a member. There was a large authority of law, the majority of which favoured investors rather than the host states. The Department submitted that the South African judicial system should be the forum of first instance.

Ms Adam presented an outline of the status of the review. On 9 March 2009 the fist draft had been completed. A stakeholder workshop had been held in April 2009. The response had been overwhelming. In June 2009 the second draft of the review had been distributed for public comment. In August 2009 an external stakeholder workshop had been held. In September 2009 additional comments had been received from the South African Human Rights Commission and from the United Nations. In October 2009 the dti was working on the third draft, which would be submitted, to Cabinet.

Ms Adam said that the review would reflect concerns regarding human rights. South Africa had a right to developmental policy space. A BIT should not restrict this. There was a need for data on foreign direct investment (FDI) trends. South African business interests needed protection.

Ms Adam noted that recommendations would be made to Cabinet. These included the need for an assessment of current risks. South Africa should learn from the experience of other countries, both in the developed and the developing world. Many first generation BITs were nearing the end of their lives. Empirical data was needed. South African investors abroad had to be protected.

Discussion
Mr Marais (DA) commented the incredible intensity of the briefing. He asked what the driving force was behind a BIT. He speculated whether it could be seen as an offensive or defensive stance, or a case of protection against investment. He was not quite sure. A World Bank report had placed South Africa 57th in the list of easiest countries with which to do business. He noted that Brazil had no BITs but was still a major recipient of FDI. He asked if there was a need for BITs to be incorporated into an investment strategy.

Mr X Mabaso (ANC) said that investment was critical for developing countries. The countries of the South had to come together. Unity was needed in the world of trade. South Africa’s efforts would be futile without unity. He asked if there was not a major element of developed countries playing one developing nation off against another. There had to be a balance between protection and investment.

Mr S Njikelana (ANC) felt that the Committee should have been provided with samples of BIT documents. He asked if the private sector had been involved with the review. He asked what the typical life expectancy of a BIT was.

The Chairperson felt that investment could sometimes be a double-edged sword. South Africa wanted to be a part of the developing community and negotiating blocs. Potential investors were often only worried about taxation issues. Huge international companies were involved as well as countries. Some companies were already involved in a country before a BIT was negotiated. She asked the dti for an assessment whether BITs were generally a good or bad idea. All must comply with the Constitution. It seemed that some of the early BITs did not. She asked if these treaties were still in operation.

Mr Carim replied that there was no straightforward answer as to what the driving force was. Initiatives had come from developed countries at first. They were concerned over the legal framework in South Africa after the change of government in 1994. There was a general concern with developing countries. A particular concern was the consequence of expropriation. Developing countries were forced to sign these agreements, guaranteeing compensation in the event of expropriation. As countries started investing overseas some protection was needed.

Mr Carim said that all studies had suggested that there was no correlation between the presence of agreements and the amount of FDI. In Brazil the important factor was the return on investment experienced by investors. Where a legal regime was in place investors would prefer a BIT being in place but it was not a deciding factor. Some African countries had signed many treaties. South Africa’s track record was not stellar. One of the factors was that BITs arose at the request of European countries. They wished to have investment protection in case their assets were nationalised. South Africa had understood this and accepted the concept of the BIT as an effort to re-enter the global economy. It had been presented as an unproblematic situation. Some bad treaties had been couched as friendship agreements. He could not say whether BITs were in essence good or bad. It was more a case of finding the right balance. BITs could be an instrument to attract investment.

Mr Carim said that the balance was currently tilted towards investors with obligation being placed on the host state. This was never an issue for South Africa until the MPRDA had been challenged. Italy had raised an objection to the expropriation clause in the Act. He could not comment further as the matter was sub judice. While the developing countries shared some common views there were particular views held on certain issues.

Mr Carim undertook to provide the Committee with copies of BIT documents. They looked very innocuous. The standard was to have eleven provisions, but a careful reading revealed far-reaching legal and financial implications. It was critical how these clauses were drafted. The dti was learning about what it wanted to see in these treaties. If South Africa was only attracting inbound investment there would only be one perspective. However, the country’s investors were now operating abroad as well. It was important to find a balanced perspective.

Ms Adam said that her research had failed to find an example of a BIT between two developed countries. She felt that it might be a question of trust between such nations, which did not exist where developing nations were involved. If there was no trust of South Africa then the country should promote its judicial standards. It was important that the treaty was drafted correctly. Some copies had been received which were over 200 pages in length whereas the first generation BITs were documents of four or five pages only. There were indications of complex issues that had arisen.

Ms Adam said that the typical life expectancy of a BIT was ten to fifteen years. An additional allowance was made for a further twenty years if one of the parties did not issue a notice that it did now wish to renew the BIT. She said that the Edge study had focussed on South African companies investing in other African states. Government representatives had not been interviewed. The questionnaire was purely for internal use.

Mr Marais said that the investment world was driven by perception. Risk was an important consideration. By and large the country which had the investors initiated BITs. Their perception was that South Africa was a risky option. When dealing with perceived risk it was important to show what protection was available and how conducive the environment was to investment. There was a continual flow of portfolio investment, which was high risk. It showed confidence in financial systems and the stock exchange. Therefore he asked why there were so many BITs. He asked if this showed a lack of trust in the South African Constitution. The dti should rather focus on that problem.

Mr Marais asked if South Africa was in a position to pick and choose which investments to accept rather that take every chance on offer. The country was competing with other emerging markets. He asked what these competing nations were doing. He asked who was contributing to the negative perception of the country. He asked what role Government saw for the private sector. Rights had to be protected. He asked what the role was for Public/Private Partnerships (PPPs).

Mr Njikelana found it commendable that the emphasis was shifting to development objectives. He asked which stakeholders had attended the workshop in August. He asked what investment trends were. The assessment plan of 2006 had been an eye-opener. The Consumer Protection Act had been introduced. Small, medium and micro enterprises (SMMEs) needed protection against giant companies. The BITs had a profound effect. It was important for legislators to be conversant with this issue.

The Chairperson was worried that BITs could be automatically renewed for twenty years. She asked if there was a database of old BITs. Government was trying to arrest the process of de-industrialisation. Some BITs were not that supportive. She asked which ones were of concern to the dti.

Mr Carim replied that the Department understood the risks to investment. Agreements were needed where the risks were high. It was a question of timing. There had been concerns immediately after 1994 over the change of government. Fifteen years later there had been an attenuation of the perception of risk. Sufficient attention could now be paid to the implications of BITs. There were serious embedded issues. Portfolio investment was a high-risk activity. He would prefer to see long-term investment. This was generally not addressed by portfolio investment.

Mr Carim said there was now trust in South Africa’s Constitution and legal framework. However, a BIT made it possible for a company to take the state to arbitration which undermined the national legal system. Developed countries share a trust of each other’s legal system. The situation now was different to that which had prevailed in 1994.

Mr Carim was not sure of the role of a PPP. The environment should be attractive to investors. The ease of doing business in the country had to improve. The issue of South Africa’s attractiveness was a general issue. There had been many studies. Investors were more concerned with profit and a sound legal system than a BIT.

Mr Carim said that the dti were arguing for a balance. The ICSID was an historical institution. The United Nations had another body for investment disputes. It was not easy to answer the question on SMMEs. A BIT would cover all South African business in a host country but it was unlikely that an SMME would have the means to participate in this level of investment.

The Chairperson asked Mr Njikelana to table the proposal he was developing while there was still quorum as some Members might have to leave.

Mr Njikelana tabled a proposal. The first clause was that the Committee and Parliament should be empowered to deal with BIT issues. Secondly, a joint session was needed with the Portfolio Committees on International Affairs and Cooperation as well as Economic Development together with the Select Committee on Trade and International Relations. This joint meeting would enhance their detailed understanding of BITs. Thirdly, the Committee should explore ways of exploring cooperation with other southern hemisphere states, other African states, the IBSA community, Russia and China to promote policy refinement.

The Chairperson said that it was important to know who would be refining the policy of the dti. This would not be done during 2009.

Mr Marais tabled a counter-proposal. He said that Mr Njikelana was excluding the larger number of parties to the IBSA agreement such as the United States of America, Asia and the Middle East. His proposal was that the proposal should not mention particular countries by name.

Mr Mabaso seconded the proposal but called for the involvement of the National Council of Provinces.

Mr Z Ntuli (ANC) seconded the proposal in mutatis mutandis.

The Chairperson said that the proposal must be typed out with amendments. It could be presented at the Committee’s meeting the following day where there would be a quorum. She instructed the Committee Secretary to do this.

Mr Carim said there was a consultative document. He would prepare a copy for the Committee. All BITs were not identical, but were generally for ten to fifteen years. If there was agreement then they could be extended. In the absence of agreement, or if one party wished to terminate the BIT, this could be done. However, all investments concluded under the BIT would be protected for a further twenty years. Investment was a long-term commitment. Many BITs were reaching their expiry date. Negotiations could be re-opened. It was difficult to be precise on which bids were of concern. Generally, all early agreements were unbalanced. Even some of the newer agreements needed strengthening.

Ms Adam said that the invitees to the workshop had included business organisations, trade unions, academics from various universities, the legal fraternity and some non-government organisations.

The Chairperson said that there were great challenges. It was significant that developed countries did not have BITs between themselves. The briefing had been highly constructive.

The meeting was adjourned.
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