SatelliteI recently commented on this issue in the Mail and Guardian newspaper. The journalist, Lynley Donnelly, sets out the broad parameters of what has become a complex issue, leading to the South African government being berated by its European trading partners in particular. These issues are so complex and contentious that I recently helped to organize a SAIIA event on the subject, at which the Department of Trade and Industry participated very actively. The webpage for that event contains useful background material for those interested in the issues. I thought readers might be interested in a fuller exposition of my views on the subject, which were contained in my email to Lynley and are reproduced below.

First Lynley’s questions are posted, then my response.

Questions:

  1. Much has been made of the decision to let BITs with countries lapse (namely Spain, Luxembourg and Belgium), while a remaining twelve are currently under review. To your knowledge, how will the lapsing of these BITs/ their cancellation impact on EU investors/ EU partner countries?
  2. How could cancellations of BITS impact on SA’s trade with the EU- if at all?
  3. The Dti has argued that essentially many BITs offer greater benefits to EU countries than SA; while the constitution provides enough protections for investors so the BIT regime should fall away. What do you make of this position?
  4. SA has a TDCA with the EU and under the auspices of SADC is negotiating an economic partnership agreement. Could either of these agreements or their negotiation be affected by the unhappiness over the BITs and how?
  5. Changes to the Minerals and Petroleum Resources Development (MPRDA)  amendment bill have been criticised as trespassing against certain BITs and agreements under the WTO. What do you make of this?
  6. Aside from issues regarding BITs, how do you think the proposals under the MPRDA bill are likely to be viewed by EU investors?
  7. On the EPA with SADC. My understanding is that negotiations have been ongoing for some time and that there is not yet an agreement  in place. Why has this taken so long?

Response:

I think the issues you raise are quite complex and don’t lend themselves to quick ‘soundbite’ responses.

In general I am sympathetic to the dti’s review process and policy direction on BITS, particularly the fact that the so-called first generation entrench problematic investor-state dispute settlement processes. Those processes are conceivably useful where a country’s domestic legal and juridical systems are suspect and open to corruption, but that situation does not apply to SA in my view. To put it in perspective the Australian government refuses to countenance investor-state dispute settlement in its BITS for the simple reason that Australian courts are more than capable of enforcing domestic laws. And the key point is that foreign investors should be subject to the same laws as domestic investors; the problem with investor-state dispute settlement being that it relocates decision-making power outside the country and into international panels whose determinations can have major implications for domestic policies.

Having said that I do have concerns about (a) how the process was handled; (b) the broader trajectory of SA’s political economy (in other words its not just the dti that should be in focus); and in light of (b) what exactly the new draft foreign investment law will contain. As your questions indicate there is plenty in the evolution of SA’s broader economic policy environment for foreign investors to be concerned about, particularly those operating in the minerals sector, but also those interested in land acquisitions and use, and more general concerns about BBBEE policies.

Furthermore, there is relatively little evidence that BITs are material considerations in foreign investors’ decision making processes. Double taxation treaties, for example, loom much larger. However, Germany is an obvious exception, since some of their states require BITs be in place prior to granting investment risk insurance, but as the dti points out such insurance can be obtained on the private market. The broader challenge with Germany  – arguably the most significant investor in SA’s manufacturing sector – and other northern European states is, in my view, a cultural one. Since the Germans are concerned about the trajectory of SA’s domestic political economy, their cultural preference for rules-based approaches to solidifying important economic relationships becomes even stronger. I sense that there is a view in the German community that SA is breaking the rules by saying it will rescind the treaty, which places in their collective minds a large question mark about the extent to which the SA government can be trusted in the future. Factor in Julius Malema et al, and I can easily see why they are concerned.

I don’t see that this process materially impacts on the EPA. Investment is, to the best of my knowledge, not included in the EPA talks. Furthermore, the EU itself does not have a common investment negotiation text or approach although that is in the process of being worked out. Hence BITs are still the default regulatory mechanism, and relevant services provisions – which are also off the table in EPAs.

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