Tuesday, July 16, 2013

Investment risk mitigation
Since the first agreement was signed between Germany and Pakistan in 1959, Bilateral Investment Treaties (“BITs”) have been relied upon by foreign investors for the protection of their interests in developing states, thereby invoking investor confidence. A BIT is contract between two states that sets the framework for the negotiation of FDI transactions between the recipients of investment (“host states”) and foreign private investors. BITs have become the main vehicle for the regulation of international investment relationships. A BIT concluded by a country wishing to facilitate investment in a host state applies to investors who are natural and juristic nationals of that country and to a broad range of investments. However, some BITs impose certain conditions with regard to their applicability.

General BIT provisions
BITs have become vital for investors wanting to invest in Africa as they primarily provide the construction for (1) conditions for the admission of foreign investors into host states; (2) standardisation of the treatment of foreign investors; (3) protection against expropriation; and (4) investor dispute resolution methods. There has been considerable controversy about whether or not the cost of these treaties outweighs their benefit to developing countries. Most critics bemoan investors’ ability to institute claims against a host state for indirect and direct expropriation as having a chilling effect on that state’s ability to effectively regulate certain sectors of its economy. Nevertheless, the number of BITs has grown significantly over the years, with close to 3000 such treaties in existence today. As of 1 February 2013, no less than 45 countries on the African continent had concluded BITs with Algeria, Egypt, and, South Africa having entered into the most number of agreements.

BIT dispute resolution
Although BITs provide comfort for international investors, parties can never completely guard against all risks, including disputes. In this regard, an important feature of BITs is the option to institute investment dispute settlement proceedings against a host state in instances of a breach by such a state. The preferable form of proceedings in this regard is generally arbitration.
There are various arbitration institutions and rules available to parties involved in BIT- related disputes, including the International Centre for Settlement of Investment Disputes (“ICSID”), the International Chamber of Commerce (ICC), and the rules of United Nations Commission on International Trade Law (UNCITRAL). The ICSID, established by the Washington Convention, which the majority of African countries including South Africa have ratified, is the main adjudicative body under the BIT dispute settlement system. In fact, the ICSID is the only purpose-built facility created for settling BIT-related disputes and is the only body that publishes a full list of arbitration disputes in addition to the decisions and awards of arbitrations taking place under its auspices. Other arbitral bodies do not generally publish their decisions or awards.
At the ICSID, the majority of the disputes arising from BITs relate to natural resources such as oil, gas, and minerals. Between 2010 and 2012, 98 international investment-related disputes have been instituted at the ICSID with BITs accounting for the majority of those claims. The ICSID statistics over that period indicate that there has been a steady rise in international arbitration related to BITs and other forms of international investment instruments. Out of those 98 disputes initiated at the ICSID during this period, 16% of them involved Sub-Saharan African countries; this is compared to 26% involving South American countries and 27% involving Eastern European and Central Asian countries.
Thus far, Piero Foresti and Others v Republic of South Africa is the only case where the South African government has been brought before the ICSID by international investors. In 2007, a group of investors from Italy and Luxembourg filed a claim at the ICSID arguing that South Africa’s Minerals and Petroleum Resources Development Act 28 of 2002 (“MPRD”) contained provisions that amounted to the expropriation of their mineral rights, thus violating the BITs that South Africa had signed with both countries. The South African government defended the MPRD by arguing that the MPRD protected existing mineral rights and allowed for their uninterrupted use as long as companies also met the government’s wider transformational obligations in some accepted combination. The matter was eventually settled and thus questions about whether a host country’s development policies could constitute expropriation of an investor’s proprietary rights were left unanswered. In the arbitration award, the ICSID Tribunal dismissed the claimants’ case and ordered them to pay part of legal the costs of the South African government.

South Africa’s stance on BITs
Whilst extensive use is being made of BITs by other African countries, South Africa is phasing out all its BITs as the government holds the view that (1) BITs hinder South Africa’s transformation objectives and its general public interest policy-making ability; (2) BITs offer disproportionately more protection to foreign investors and offer varying protection among those foreign investors; and (3) the Constitution of South African provides adequate protection for foreign investors. The government of South Africa intends to enact the proposed Foreign Investment Bill which will replace current BITs by codifying BIT-type protection into domestic law in the hopes of modernising and improving the foreign investment regime. This move has been met with widespread criticism due to fears of the loss of much-needed FDI in South Africa.