Ditch treaties that bite

06 November 2013

South Africa is moving away from international investment treaties towards a new framework for investment protection based on domestic law. Contrary to some opinions, there are cogent arguments in favour of this approach.

In 1995, The Netherlands and SA signed a bilateral investment treaty (BIT) which is now coming up for review. The deadline for notification of termination of the Dutch BIT is this week, or the treaty will automatically be extended for a further 10 years.

The SA-Netherlands BIT was signed at a time when the newly democratic SA's economic policy had yet to take shape. Initially, BITs were a sign of goodwill in respect of incoming investments. The investor-to-state dispute settlement clauses in most BITs enable transnational corporations to sue states over actions and policies that might affect the profitability of their investments.

This option was rarely used until the end of the 1990s. International investment lawyers are increasingly urging foreign investors to sue host states for expropriation damages, which can include regulatory measures taken in the public interest.

In 2007-2010, SA undertook an extensive, multistakeholder review of its 19 BITs, and found their added value was limited. SA does not receive significant foreign investment from many of its BITs, but it receives significant investments from countries with which it does not have BITs. The review concluded the BIT framework for investment protection poses a growing risk to policy making in the public interest. It raised the issue of the ambiguities in many BITs and the inconsistency in awards granted by arbitration panels.

Another concern was clauses which prevent capital controls. The current global crisis has highlighted the potentially destabilising effects of unrestricted capital movements which might cause serious balance of payments problems.

Claims in investor-state disputes can run into hundreds of millions of dollars, so even the threat of one can make governments reconsider legitimate legislation in the public interest. Faced with a growing number of investment claims - 514 cases worldwide in the past decade - some governments, including SA's, feel their power to regulate is increasingly constrained by the current investment protection framework.

The SA-Netherlands BIT offers dispute settlement regarding "any measures depriving, directly or indirectly, investors of their investment" with the investment protections extending to "any performance having an economic value". The Netherlands is second only to the US as the origin of investor claims against states. There are an estimated 23500 "mail box" companies, large foreign companies registered in The Netherlands through holding companies for tax avoidance purposes - but which also qualify as Dutch companies under BIT treaties. The Netherlands has signed BITs with 98 "developing" countries.

BITs have become increasingly controversial as the cases mount - till now most claims have originated in the US and Europe, and most are brought against poorer states. Dutch policy makers have not been concerned with the risks these treaties potentially pose as the Dutch state has not had to defend itself in a case to date. This might change after the European Commission concludes free-trade agreements - which usually include investor protection clauses - with Canada, the US and Japan. An investment agreement with China is also in the making.

One hopes that when SA notifies the Netherlands of the termination of the BIT at the end of this month Dutch policy makers will take SA's position seriously. And perhaps SA's example might lead to an investment policy that not only balances investment protection with wider stakeholder concerns but includes investor obligations to safeguard the public interest.

photo by Robert Cutts