Why is the EU threatening to cut investment in South Africa?

July 19, 2013

     By Duncan Green     

Bilateral Investment Treaties are one of those nerdy ‘important but dull’ bits of international governance that too often get ignored by NGOs and others. So thanks to Liz May at Traidcraft for drawing my attention to this week’s punch-up between South Africa and the EU.

First the fisticuffs. According to South Africa’s equivalent of the FT, Business Day,

Karel De Gucht, the European commissioner for trade, on Wednesday made short shrift of pleasantries in his opening remarks at the second SouthBITs cartoonAfrica-EU Business Forum in Pretoria. Mr de Gucht said European investors were watching South Africa carefully after the country unilaterally cut bilateral investment treaties with some European Union (EU) member states, including Belgium and Luxembourg, and indicated it would do the same with about a dozen other countries. He said it might be only a matter of time before European investors looked elsewhere for trade.’

That’s a pretty serious threat – according to Business Day ‘in 2010 the EU accounted for 88% of total investment stock in South Africa’ (I assume it means foreign investment, but it doesn’t specify).

But the South African government feels it has no option, because companies have begun to use BITs to sue it for, among other things, pursuing affirmative action policies. According to a useful briefing from IISD, the rethink started with a 2007 claim by several Italian citizens and a Luxembourg corporation, filed under the Belgium-Luxembourg BIT with South Africa. The claimants charged that the 2004 Mineral and Petroleum Resources Development Act (MPRDA)—part of South Africa’s efforts to increase participation by historically disadvantaged South Africans in the mining industry through so-called Black Economic Empowerment legislation —amounted to the expropriation of their mineral rights.

South Africa was forced to settle (terms unknown) in 2010, prompting the government to reconsider its investment treaty policies. A report issued by the Department of Trade and Industry (DTI) concluded:

“Existing international investment agreements are based on a 50-year-old model that remains focused on the interests of investors from developed countries. Major issues of concern for developing countries are not being addressed in the BIT negotiating processes”.

Globally BITs have been signed by the hundred over the last 20 years, often using boilerplate text with only minimal scrutiny. In South Africa, they came in a rush after the end of apartheid in 1994. According to a Traidcraft Briefing, by 2012, there were 2,833 BITs, of which have over 1,200 involve EU member states. The UK alone has an estimated 98 in force. BITs create a ‘regulatory chill’, deterring governments from action and locking in the Washington Consensus policies of liberalization, even as many governments have started to rethink areas like industrial policy.

The heart of the problem is that BITs are often attempts at ‘kicking away the ladder’, in the words of Ha-Joon Chang (and Friedrich List before him), preventing developing countries like South Africa from pursuing the policies that worked for now developed countries – not only the East Asian tigers, but the US and Germany in previous centuries. Often these have involved differentiating between foreign and domestic companies, but this has now been branded ‘discrimination’ and outlawed by numerous BITs and other treaties.

Occidental-petroleumBITs are also proving a bonanza for lawyers and litigious companies. In 2011, there were 450 known cases being brought, up from 15 in 2000, and the American Lawyer magazine reported on 113 BITs cases that involved costs of at least $100 million. In 2012, Ecuador was ordered to pay $1.77 billion under the terms of the Ecuador-US BIT, in compensation to Occidental Petroleum for terminating an oil exploration contract – an award equivalent to Ecuador’s entire education budget.

Now governments like South Africa are starting to try and get rid of or revise the bad ones, but the bullying tone adopted by Mr de Gucht suggests that won’t be easy.

Last word to Traidcraft, in a comment on the Business Day piece:

‘The threat of million if not billion dollar compensation claims by foreign investors when government policy threatens to undermine the profitability of their investment is reducing policy space. The fact is that BITs are not necessary to attract investment (Brazil has no BIT); a stable economy with growth prospects or even just an abundance of natural resources is sufficient to attract foreign investors. And let’s not forget that every investment will be governed by a contract as well so there is no need for the state to absorb most investment risks through BITs as well. South Africa has had much foresight to change their position on BITs to ensure their sovereign right to decide their own policies. Hopefully, other countries including the EU will follow.’

July 19, 2013
Duncan Green