Could South Africa do more to protect foreign investment, asks Jojanneke Deelstra, legal counsel for debt recovery firm Omni Bridgeway.
During the second half of the 20th century, private foreign investment played an increasingly crucial role in the economic development of countries.
It provided access to resources such as capital, technology and know-how. However, sanctions and boycotts during the 1980s and early 1990s cut South Africa off from an inward stream of foreign capital.
Moreover, already established foreign investors withdrew from the country. And even after Europe and the US started lifting official sanctions as a result of South Africa’s measures to end apartheid after 1991, foreign investors were slow to return.
Banking institutions considered the country too unstable and foreign corporations were scared off by high labour costs and social unrest.
The post-apartheid government of 1994 inherited an economy wracked by long years of internal conflict and external sanctions.
On May 24, 1994, in the State of the Nation speech, the newly-elected President Nelson Mandela promised that: “The government will also address all other matters that relate to the creation of an attractive investment climate for both domestic and foreign investors, conscious of the fact that we have to compete with the rest of the world in terms of attracting, in particular, foreign direct investment.”
The government delivered on those promises and took steps to open the country to foreign investment. Between 1994 and 2000, South Africa concluded bilateral investment treaties for the promotion and protection of investments (BITs) with most of its trading partners, including the UK, Canada, Germany and Switzerland.
These BITs not only gave foreign investors substantive guarantees against unfair and unequal treatment and government expropriation, but also provided for an independent dispute settlement mechanism for resolving disputes with host states, either through consolidation or arbitration.
The government’s efforts to promote South Africa globally as an investor-friendly country resulted in increased regional trade and economic links with other countries, as well as an increased number of foreign investors returning to South Africa.
At the same time, South Africans were actively investing in their neighbouring African countries. They started doing so in the apartheid era and continued after 1994. Tourist facilities were a favourite target.
Today, notwithstanding the global economic crisis, South Africa has maintained and expanded its position in Africa to become one of the major – if not the largest – foreign investor in its home continent.
This has been aided by the fact that most of these markets are virtually virgin territory on which South African businesses have mushroomed. In these areas, and particularly in Southern Africa, many regard South Africa as the key engine for regional economic growth.
South Africa has therefore obtained the unique position on the African continent as being both a foreign capital exporting and importing country (a so-called “home state” and “host state” for foreign investors).
Problems with arbitration
The South Africans’ willingness to invest in developing African countries is not without economic and political risks. Stable political environments and reliable domestic courts are often missing. Domestic courts are considered to lack experience of complex investment disputes, awareness of investors’ rights under international (customary) laws, efficiency, and even independence.
There is also the risk that decisions of African domestic courts are not (easily) enforceable in other jurisdictions.
Therefore, when investing in African countries, forum clauses in commercial contracts can provide for the settlement of disputes between investors/contractors by an independent and neutral arbitral forum, under an agreed set of procedural rules, in an agreed language, at an agreed venue and by arbitrator(s) specialised in the laws and techniques required.
With arbitral forum clauses, investors are also able to profit from the mechanisms developed for the global enforcement of arbitral awards under the New York Convention of 1958.
This convention has been adopted by 144 countries including a majority of African states, such as Nigeria, Mozambique, Zimbabwe and South Africa. The New York Convention requires courts of member states to give effect to an agreement to arbitrate and to also recognise and enforce awards made in other states, subject to specific limited exceptions.
Despite the fact that the New York Convention is widely recognised as the foundation of the success of international arbitration, it is important to note that a limited number of African states – such as Namibia, Angola and Congo – have still not ratified it.
Furthermore, some of the African states that did ratify the New York Convention have exercised their rights to reserve reciprocity and to limit its application to commercial relationships. South Africa has not made any reservations and has implemented the provisions of the New York Convention into domestic legislation.
However, by implementing the New York Convention into national legislation (the Recognition and Enforcement of Foreign Awards Act of 1965), South Africa deviated from the New York Convention. One of the obstacles created by South Africa’s legislature is the prior permission from the minister of economic affairs, which is required before enforcing an award relating to, for example, mining, production, importation and exportation disputes.
Not only for enforcement issues, but also for selecting South Africa as place of arbitration, consideration should be given to the applicable national legislation on arbitration and in particular to South Africa’s Arbitration Act of 1965 and its particularities.
South Africa’s arbitration legislation dates back to 1965, the era of apartheid, and it still gives domestic courts wide powers to interfere in arbitration proceedings. The courts may for good cause order that the arbitral agreement cease to have effect or that a particular dispute not be referred to arbitration.
In addition, if a ‘good cause’ exists the court may remit any arbitration to the arbitration tribunal for reconsideration and for the making of a further or a fresh award or even to set aside the award.
It is widely argued, both inside and outside South Africa that the arbitration legislation of South Africa does not adequately protect and promote international commercial arbitration, and it is further argued that South Africa should adopt the so-called model law.
This model law is designed by the United Nations to assist states in reforming and modernising their arbitration acts in accordance with internationally accepted standards that reflect a minimum degree of possible judicial intervention and a significant decree of party autonomy.
Despite the shortcomings of South Africa’s arbitration act, an increasing number of South Africans still resort to arbitration in South Africa for the resolution of their cross-border disputes within Africa.
This is notwithstanding the fact that many other African countries have adopted the model law and therefore have more favourable legislation on arbitration. The Arbitration Act of South Africa seems to require significant updating before South Africa can qualify as one of the preferred arbitral venues of Africa.
The Washington Convention
The influence of domestic courts on commercial arbitration proceedings, together with the lack of legal protection against unlawful (ultra contractual) actions of states, was recognised by the World Bank as one of the greatest hurdles for foreign investment in developing countries.
Recourse against host states which deprived investors of infrastructure projects, hotels, airports, hospitals, andlicenses for exploration of natural resources was considered unavailable and soft diplomacy by home states often proved ineffective.
The World Bank initiative of the Convention on the Settlement of Investment Disputes (Washington Convention) was an answer to that problem.
Pursuant to the Washington Convention, the International Centre for Settlement of Investment Disputes (ICSID) was established in 1966. ICSID was created with the primary aim of promoting economic development by providing a procedural framework for the conciliation and arbitration of investment disputes arising between host states and investors.
The system functions on an international level independent of local domestic courts (a so-called “self-containing” system). Domestic courts have no power to stay, compel, review, annul or otherwise influence ICSID proceedings. Arbitration at ICSID pursuant to the Washington Convention is particularly appealing because ICSID awards are automatically enforceable in all member states as if they are final court judgments of that member state.
Over the years, participation in the Washington Convention has grown steadily. The majority of Arab countries are represented; most Asian countries, including China, are parties; and a number of former Soviet Republics are members. There are currently 155 state signatories to the Washington Convention and 144 of them have ratified the convention. South Africa, although a host and a home state for foreign investors, has however not signed or ratified it.
Despite the fact that, contrary to many recommendations, South Africa has not signed the Washington Convention, it does have general standing offers in its BITs to conciliate and/or arbitrate investment disputes pursuant to the ICSID rules.
However, as long as South Africa does not sign up, investors can only use the facilities of the ICSID Centre under the so called Additional Facility Rules (“AF-Rules”) without officially falling under the international jurisdiction of the Washington Convention and its favourable provisions.
Under the AF-Rules, investors cannot benefit from ICSID’s stand-alone mechanisms: domestic courts still have a power to stay, review, or annul arbitral proceedings. The enforcement of awards rendered under the AF-Rules, as with commercial arbitrations, depends on the domestic courts to apply the New York Convention and/or other treaties.
Although many within South Africa have pleaded for the Washington Convention to be signed in order to provide South Africa’s investments adequate protection under ICSID, President Jacob Zuma’s administration – and its predecessors – has refrained from doing so.
An end to bilateral ties
There has been a huge increase in foreign investment over the years as a consequence of globalisation and the opening of formerly closed economies.
The increase of investment worldwide and the increasing number of standing offers of states to arbitrate pursuant to bilateral and multilateral investment treaties as well as their domestic foreign investment laws has resulted in an increasing number of international investment arbitrations.
The current serious friction between states and investors in, for example, Latin America, has made investors turn to ICSID with even greater frequency.
In turn, countries like Venezuela, Ecuador and Bolivia have, in present times of nationalisations, criticised ICSID’s overriding jurisdiction over foreign investment disputes. As a result, both Bolivia (in 2007) and Ecuador (in 2009) withdrew from the Washington Convention and in October 2009, Ecuador announced its plans to renounce its 13 remaining BITs (Ecuador has already terminated eight trade agreements to avoid further exposure of the country to international investment arbitrations).
Countries outside Latin America have also announced reviews of their obligations under investment laws and treaties. Criticism of BITs has also arisen in South Africa, mostly directly stemming from its experiences in Piero Foresti, Laura de Carli and others versus Republic of South Africa.
In that arbitral dispute, non-South African mining companies claimed compensation on the basis of expropriation and unfair treatment on the grounds that their investments were harmed by the Petroleum Resources Development Act and the obligation to comply with broad based black economic empowerment (BEE) targets.
The South African government, however, argues that the BEE targets are necessary to redress the devastating socio-economic impact of apartheid and to ensure human rights, such as the right to equality, as well as sustainable, equitable development.
The “sustainable” development of South Africa seems to be one of the central policies of South Africa as presented by the newly-elected President Zuma in his State of the Nation speech of June 3, 2009. With regard to foreign investment he states: “The main goal of government for the medium term is to ensure that our foreign relations contribute to the creation of an environment conducive to sustainable economic growth and development.”
In the June 2009 governmental position paper: “Bilateral Investment Treaty Policy Framework Review”, the Zuma government further explained its vision on the sustainability of its foreign investment policy and particularly its BITs.
Many of the BITs signed by South Africa are based on 50-year old models which remained, according to this governmental paper, focused on the interests of investors from developed countries.
In 1994, the South African government was simply still unaware of the possible impact that BITs could have on future policies.
Since these BITs will expire soon, the government announced – in its Position Paper – its intention to review and update its BITs with today’s knowledge and experience.
The position paper argues that future BITs should create more equitable relations between investors and host states, promote and protect foreign investment with the necessary safeguards, but also preserve flexibility in a number of critical policy areas such as human rights, human health, environment, national security, natural reserves and taxation.
They should also ideally address performance requirements such as the transfer of technology, training of local workers, sourcing input locally, encouraging sustainable developments, and include rules on liability for operations in the host state.
Not surprisingly, foreign investors are cautious about the Zuma presidency. The position taken by the government in its position paper could have serious consequences for foreign investment in South Africa and for South Africans investing elsewhere.
The current defects and pitfalls in the arbitration legislation of South Africa, combined with the imposition of far-reaching performance requirements on investors and the right of South Africa to change laws and regulations directly effecting foreign investment, run the risk of scaring off potential foreign capital.
The changes proposed to BITs would also jeopardise South African investments abroad. Future investment would be at the mercy of the developing and often politically unstable host states in which South African investors are still willing to invest.
In that respect, this idea touches upon a delicate subject in recent history. When Zimbabwe introduced a land reform programme to seize and transfer property by armed force and without compensation, it harmed many South African farmers.
Lacking a BIT between both countries, South African victims of Mugabe’s wrongdoings could not enjoy the same protection as the Dutch farmers enjoyed under The Netherlands/Zimbabwe BIT in the Funnekotter and others versus the Republic of Zimbabwe case.
Although, some South African farmers did obtain a ruling from the tribunal of the Southern African Development Community (SADC), this more regional award has proven difficult to enforce.
Despite the strong lobby of the farmers, and after a decade of negotiation on exactly this issue, the South African government decided to bear the loss and accepted to sign a new South Africa/Zimbabwe BIT without it having a retroactive effect. The BIT therefore does not provide for any further protection to the previously deprived South African farmers and this left them greatly disappointed and frustrated.
The recent ruling of the South African court in which it (upon urgent request of the farmers) ordered the government of South Africa to protect the land rights of the deprived farmers in Zimbabwe, as well as to finally respect the rulings of SADC, had some calming effect on the turmoil surrounding this new BIT.
Another aspect of this new South Africa/Zimbabwe BIT requires attention as well. The South Africa/Zimbabwe BIT is still based on the old model.
Deviating from Zuma’s intentions as stated in the Governmental Position Paper of June 2009, this BIT provides: no performance requirements for investors; no rights for either Zimbabwe or South Africa to change laws and regulations; and no specific provisions on the desired flexibility in a number of critical policy areas, with – however – one minor exception on the right of investors for getting no less favourable treatment than other local or foreign investors.
This right shall not include benefits given to persons or categories of persons for reasons of promoting equality or advancing disadvantaged persons by unfair discrimination. Only this small concession reminded us of the rather alarming Governmental Position Paper of June last year and for that reason the BIT has been received by current and future investors with some relief as well.
South Africa’s future
The current South African government seems to support a mixed economy that combines an element of state intervention, regulation of private ownership and competition.
At the same time, South Africa seems more than ever dependent on the injection of foreign capital to solve the social needs of its people. In this environment, South Africa is sending mixed signals to investors about sovereign risks.
On the one hand, Zuma’s administration has tried to reassure investors that its investment friendly nature still exists, but on the other hand the government has published the Governmental Position Paper on the undressing of BIT-protection.
Accordingly, Zuma’s administration is walking a tightrope between maintaining the goodwill of foreign investors and South Africa’s own investors. South Africans are still increasingly investing in their home continent but these investors will not favour Zuma’s proposals to remove the protection mechanisms from its BITs.
Ultimately, without effective BITs, South African investors will be left at the mercy of developing and often political unstable host regimes.
It is said (and perhaps even proven by the recent signing of the South Africa/Zimbabwe BIT) that the Zuma administration is hesitant to act against the will of investors because it is so constrained by the need to raise funds for its social agenda.
South Africa can simply not afford to risk losing the inflow of foreign capital by undoing its BITs. However, in these early days of Zuma’s presidency, the people of South Africa have already demanded that Zuma delivers on his pro-poor election mandate.
Will Zuma be able to live up to these promises and curb the rising poverty without making the investor pay for it?
It will be one of many challenges Zuma will be facing in the coming years. If Zuma seriously wants to reassure the world of South Africa’s investor-friendly climate despite its reforms, he should, at least, update its arbitration legislation without delay, implement the New York Convention without deviation, sign the Washington Convention and review the effects of the plans to dismantle its BITs.