South Africa will pay for bilateral treaties blunder

AS THE parliamentary committee on trade and industry resumes its analysis of the Promotion and Protection of Investment Bill on Tuesday, it is important to interrogate the rationale behind the legislation. A sober inquiry reveals a costly misstep by the Department of Trade and Industry in its treatment of SA’s bilateral investment treaties (BITs), which the bill is supposed to replace.

BITs are binding agreements under which two sovereign states reciprocally guarantee that enterprises making investments from one state into the other will be entitled to certain standards of treatment and to enforce those standards directly by taking the host state to international arbitration. Since democracy dawned, SA has signed 45 BITs, 22 of which eventually entered into force.

In June 2009, the Department of Trade and Industry concluded that SA "should review its BIT practices, with a view to developing a model BIT that is in line with its development needs". A year later, the Cabinet decided this review would be "the basis on which BITs could be evaluated and renegotiated". This coincided with the entry into force of the Southern African Development Community (Sadc) protocol on finance and investment, which contained most of the classic BIT protections but balanced them with sustainable development imperatives and reserved the host state’s right to regulate in the public interest. The protocol obliged Sadc members to harmonise legal regimes for foreign investment in accordance with international best practice.

Astoundingly, the department began eliminating SA’s treaties altogether, rather than renegotiating them in accordance with the 2010 Cabinet decision and its own 2009 recommendation. The department explains that the terminations have been "unfolding indiscriminately", as and when each treaty becomes ripe for termination. It is peculiar, then, that only European states have had their BITs terminated, while those with other states are equally restrictive of SA’s regulatory freedom and equally ripe for termination.

Disturbingly, there was no public consultation or parliamentary deliberation before the BITs with European states were purged, nor any engagement with major investors.

For more than half of these BITs, there has still not been even any public notification that they were denounced. Had there been engagement, trade and industry would have been warned that it would be an embarrassing blunder to reform the BITs by unilateral termination rather than bilateral renegotiation. The reason is that the unilateral termination of any BIT activates a "sunset clause" that entrenches its investment protection provisions for up to 20 years later. Renegotiation, however, would not have this far-reaching result.

The very BITs targeted by the department will continue to constrain the government’s regulatory licence and expose it to international arbitration for many more years than they otherwise would have.

The department appears to have approached reforming SA’s treaty relations in the worst way possible, maximising the diplomatic costs while minimising the legal benefits, leaving SA needlessly exposed to an outdated regime of investment protection for at least the next 20 years. This slip-up may prove to cost the country dearly. This is all the more regrettable as an appropriately considered and consultative approach could have put SA at the forefront of progressive trends in international investment protection.

This remarkable misstep reminds us of how little insight and oversight our government grants us when it comes to the country’s international economic engagements, ranging from BITs to more specific and financially far-reaching deals, such as contracts for the procurement of arms or nuclear energy. The BIT bungle should serve as a lesson that greater transparency and public participation in assessing the implications of international agreements may save the country from more mistakes.