BITs ‘not decisive in attracting investment, says South Africa

Original Publication Date: 
27 September, 2012

Published in SUNS #7446 dated 27 September 2012

Geneva, 26 Sept (Meena Raman) -- South African government's experience has shown that there was no clear relationship between signing Bilateral Investment Treaties (BITs) and increased inflows of FDI, according to a senior official of that nation.

South Africa's Deputy Director General from the Department of Trade and Industry, Mr. Xavier Carim, gave this view at a WTO Public Forum on international investment agreements held on Tuesday, 25 September.

The session on international investment agreements at the WTO public forum was organized by Our World Is Not for Sale Network, the International Trade Union Confederation, and Public Citizen entitled "Investment provisions and agreements: What is the right 21st century approach?"

Others in the panel included Ms. Sanya Reid Smith from the Third World Network, Ms. Melinda St. Louis from the US Public Citizen's Global Trade Watch, Mr. Roberto Bissio from Social Watch in Uruguay and Dr. James Zhan, Head of Investment Policies and Capacity Building Branch at UN Conference on Trade and Development.
Carim, one of the presenters at the international investment treaties session, said that his government's experience demonstrated that there was no clear relationship between signing Bilateral Investment Treaties (BITs) and increased inflows of FDI, which had been a motivating factor in signing BITs in the 1990s.
"We do not receive significant inflows of FDI from many partners with whom we have BITs, and at the same time, we continue to receive investment from jurisdictions with which we have no BITs. In short, BITs are not decisive in attracting investment," Carim said.
"In addition, over the last decade, South Africa had to confront several challenges, and threats of challenge, brought under various BITs. This focussed our minds! Most of the threats of challenge can only be described as spurious or frivolous but they all underscored the fact that BITs do not adequately take into account the particular conditions found in South Africa, the complexities of our socio-economic challenges and the broad objectives of government policy," he added.
Referring to South Africa's post-apartheid Constitution which embedded "a transformation agenda that seeks to overcome deeply rooted inequities inherited from apartheid's exclusionary policies," Carim said that the Constitution "also provides for non-discrimination between foreign and domestic investors and all investors need to undertake their activities in this context of the transformation agenda set out in the Constitution."
"However, as we assessed the bilateral investment treaties that we had entered into, we began to identify a range of inconsistencies with the Constitution," and this, "prompted South Africa to review the BITs in 2008."
After the reviews, Carim said, the South African Cabinet concluded that South Africa "should refrain from entering into BITs in future, except in cases of compelling economic and political circumstances."
Giving a short background of South Africa's experience, Carim said at the outset: "In the immediate post apartheid era (1994-1998), South Africa concluded around 15 BITs mainly with European countries. At the time, this was a good faith attempt to assure investors that their investments would be secure under the new democratically-elected government. Signing these BITs was also seen as an important diplomatic signal confirming South Africa's re-entry to the international community after the years of isolation under apartheid.
"However, we soon became aware of challenges posed by international investment treaties. We observed the fractious debate in the OECD when its members were seeking to negotiate a multilateral investment agreement in the late 1990s. We were participants in the discussions in the WTO that sought to include, as one of the Singapore Issues - trade and investment - in the Doha Round negotiations, where many developmental concerns emerged in the engagements."
"Perhaps most seriously, the spike in international investment arbitrations that followed the financial crisis in 2008 laid bare that bilateral investment agreements can pose profound and serious risks to government policy," he said.
Carim referred to the intervention by South Africa's Minister of Trade and Industry, Dr Rob Davies, on 26 Sep. at the UNCTAD Trade and Development Board discussion on Investment Policy Framework for Sustainable Development, and said his own presentation at the WTO forum complemented Davis's statement at the TDB.
The South African government, Carim said, had held "extensive and intensive consultations in South Africa over a three-year period. We invited international experts to contribute to the discussion. The review identified a range of concerns associated with expansive interpretations of the provisions usually found in BITs: definitions of investment, investor, national treatment, fair and equitable treatment, most favoured nation clause, expropriation, compensation, transfer of funds etc."
"The review also identified difficulties with respect to international arbitration. It observed fragmentation in the system; the lack of common standards of protection; inconsistent interpretations by arbitration panels even on similar matters; as well the growing complexity of the international system through an evolving jurisprudence. All this exacerbates uncertainty and risk," he added further.
"In particular, we were concerned with investor-state dispute provisions in our BITs. This, in our view, opens the door to narrow commercial interests on subject matters of vital national interest and to unpredictable international arbitration outcomes, and is a direct challenge to constitutional and democratic policy-making," said Carim.
"Against this background, in April 2010 the South African Cabinet concluded that South Africa should: First, refrain from entering into BITs in future, except in cases of compelling economic and political circumstances. Second, the Cabinet instructed that all ‘first generation' BITs which South Africa signed shortly after the democratic transition in 1994, many of which have now reached their termination date, should be reviewed with a view to termination, and possible renegotiation on the basis of a new Model BIT to be developed."
"Third, the Cabinet decided that South Africa should strengthen its domestic legislation in respect of the protection offered to foreign investors. In this regard, key considerations would be to codify BIT-type protection into South African law and clarify their meaning in line with the South African Constitution. We would also seek to incorporate legitimate exceptions to investor protection where warranted by public policy considerations such as, for example for national security, health, environmental reasons or for measures to address historical injustice and or promote development.
"Fourth, the Cabinet elevated all decision-making in respect of BITs to an Inter-Ministerial Committee tasked with oversight of investment, international relations and economic development matters."
Carim added: "This is the work we are undertaking now. The process of interdepartmental consultations is underway; there will be an extensive set of intergovernmental consultations as well as consultations with stakeholders and with Parliament - a social and economic dialogue."
"We are working to terminate existing BITs; develop a new Model; and developing an Investment Act. This is complex technical and legal work and is unfinished. Nevertheless, our broad policy approach is clear. We aim to update and strengthen South Africa's investment regime to ensure that South Africa remains open to foreign investment, provides adequate security and protection to all investors, while preserving the sovereign right of the South African Government to pursue its developmental public policy objectives. We also aim to reduce exposure to the unpredictable risks we see and have had to confront in our bilateral investment treaties."
"The new approach does not introduce any new obstacles to investment but will establish a framework for more equitable relationships between investors and Government based on respect for human rights, the rule of law and due process, sustainable development, and security of tenure and property rights within the framework created by the South African Constitution."
"As we do this nationally, we are acutely aware of the unfolding debate at the international level. In broad terms, a broad distinction can be discerned between a Freedom of Investment Model, on the one hand, and an Investment for Sustainable Development Model, on the other. The Freedom of Investment model tends to assume that all investment is good, and that all investment promotes development."
"The derived policy implications are that Governments should continue to liberalise their investment regimes, reduce or limit regulations and conditions on investors and, in so doing, realise the benefits of FDI. ‘First generation' BITs tend to reflect this approach."
"The Investment for Sustainable Development Model approach recognizes that while FDI can make a positive contribution to sustainable development, the benefits to host countries are not automatic. It posits that regulations are needed to balance the economic requirements of investors with the need to ensure that investments make a positive contribution to sustainable development in the host state."
"The associated benefits of investment as they relate to technology transfer, skills development, research, establishing local economic linkages etc., need to be purposefully built into the investment regime, and not taken for granted. New thinking and practice in international economic policy-making, notably with respect to the role of state in economic development, finance and industry, are also finding expression in international investment policy-making."
"The debate on international investment treaty and policy is yet to be settled, and there are numerous efforts underway to fashion a common understanding to international investment policy. UNCTAD's plays a vital role in this process given its long-standing work and expertise on investment policy from a development perspective. Indeed, the Investment Policy Framework for Sustainable Development developed by UNCTAD gives us a strong point of departure for such dialogue and cooperation. South Africa will participate in this dialogue, and we will also participate in other forums, as we search for a common understanding on what could constitute an appropriate model and framework for investment protection and promotion at the international level."