Zuma's Nigeria trip tests South Africa's new investment protection paradigm

WHEN President Jacob Zuma arrived in Abuja last month, for what Parliament termed a "rapprochement" between Africa’s two largest economies, many hoped he might tackle the growing apprehension that Nigeria is no longer hospitable towards South African investments.

But the visit raises a bigger question: can South African companies count on their government to protect their best interests abroad?

Recent months have seen several South African companies confronted by increasing scrutiny from Nigerian regulators, reinvigorated under the government of President Muhammadu Buhari, the former military ruler and self-confessed "converted democrat" who has led the country since last May.

In a precipitous regulatory crackdown, the reformist Buhari administration has tightened the reins on critical sectors of an economy still struggling to diversify away from crude oil exports.

In January, Truworths closed its last two Nigerian outlets, as increasingly stringent import restrictions and exchange controls made it practically impossible to get merchandise in and money out.

In the same month, Standard Bank’s Stanbic IBTC had to obtain an injunction restraining Nigeria’s Financial Reporting Council from levying a $5m fine and freezing bank transfers over alleged accounting irregularities, while four Sun International employees (including three South Africans) were detained without charge for four days by the Economic and Financial Crimes Commission, investigating a related Nigerian firm.

Most notoriously, late last year the Nigerian Communications Commission suspended all regulatory services to MTN and struck it with a $5.1bn fine (later negotiated down to $3.9bn), allegedly for failing to disconnect more than 5-million unregistered SIM cards. This has slashed MTN’s earnings in half and shaved a fifth off its share price.

After lodging a challenge in Nigeria’s local courts (which Buhari denounced as an attempt to "disarm" his government), MTN has since withdrawn it, and offered a $1.5bn settlement.

Buhari has defended the measures against MTN as vital to protect Nigerians from Boko Haram terrorists, who reportedly use unregistered SIM cards to elude detection. Zuma stood silently beside Buhari during the visit last month, making no mention of the troubles facing MTN and other South African investors in Nigeria.

Addressing the SA-Nigeria Business Council at the end of his trip, Zuma said that: "Our governments are obliged to create environments that enable seamless trade and make our countries attractive for both local and international investment."

He added that, "Our ministers and their teams are already engaging at different levels with the private sector to find amicable solutions to some of the challenges that you have highlighted."

It is not clear which rules, if any, regulated these engagements. But rules were written as far back as 2000, shortly after Nigeria emerged from decades of military strife, at a time when it hosted only four South African investors, compared with more than 120 today.

Zuma was deputy president in 2000, and negotiated and signed a binding treaty with his Nigerian counterpart "for the reciprocal promotion ... of investments".

LIKE other bilateral investment treaties, this pact guaranteed businesses from each country that any investments they made in the other would be legally protected against, among other things, regulatory treatment that is discriminatory, arbitrary, or abusive.

Crucially, investors could enforce these guarantees through independent international arbitration against the host government, without needing permission or representation from their home government.

The treaty, thus, allowed investor disputes to be resolved in a rules-based vacuum, without complicating or contaminating the two governments’ relationship on wider diplomatic, economic, or even military affairs.

SA signed similar bilateral investment treaties with dozens of other countries, not only to secure outbound investments into developing economies (for example, Ghana and Mozambique), but also to stimulate investment inflows from established economies (the UK and Germany) and emerging economies (Russia and China).

However, following two costly arbitration claims brought against SA by European investors, the Zuma administration decided in 2010 to stop signing bilateral investment treaties, deeming them outdated, unneeded, and unduly restrictive of the state’s "right to regulate in the public interest".

Cabinet mandated the Department of Trade and Industry to renegotiate existing treaties under a template more accommodating of the priorities of developing states.

Rather than renegotiation, however, the department has, since 2012, undertaken a targeted termination of all 13 treaties with European states, replacing them with a domestic statute, the Protection of Investment Act, signed by Zuma last December.

This statute simply confirms that the Constitution applies to foreign investments in SA, and that in the absence of bilateral investment treaties, they will not have any additional protection.

Significantly, the act dictates that investment disputes will be settled only domestically or bilaterally between states, no longer by investor-state international arbitration, which, according to the Department of Trade and Industry, "falls short of meeting the standards of legal correctness and consistency", owing to "its ad hoc nature, its fragmentation, and a perceived lack of transparency and legitimacy".

But, these criticisms apply much more forcefully to the ancien régime of diplomatic protection (state-state settlement of investment disputes), which the act resurrects: an unregulated ocean in which remedies for breaches of investor rights depend not on law, but on leverage, on the investor’s influence over its home government and, in turn, that government’s influence over the host government.

THUS, what the department heralded as "the new paradigm" of investment protection is indeed nothing other than the old paradigm, which was superseded by bilateral investment treaties for good reason: sustainable development demands that international investments be protected by fixed laws rather than fickle lobbying.

The department reassured Parliament that European investors neither need nor want bilateral investment treaties with SA, where world-class protection is guaranteed by a strong Constitution and reliable court system.

Nevertheless, it is difficult to dismiss as mere coincidence the finding by the United Nations Conference on Trade and Development that SA’s investment inflows fell to $1.5bn last year — a staggering 74% less than 2014 and 82% less than 2013.

This decline cannot be blamed exclusively on challenging global conditions, as it was worse than any anywhere else in Africa, which received $38bn overall last year (31% less than 2014). Nigeria, for example, fared much better than SA, taking $3.4bn of Africa’s inflows last year (27% less than 2014), despite depressed oil prices.

However elusive, this nexus between bilateral investment treaties and investment inflows perhaps explains why the department has not terminated the equally restrictive treaties that protect Chinese and Russian investors in SA, as well as those that secure South African investments in developing countries with less reliable domestic institutions.

FOR example, Nigeria lags far behind SA on the World Economic Forum’s latest Global Competitiveness Index: out of 140 countries, Nigeria ranks 91st for the efficiency of its legal framework for challenging regulations (SA ranks 17th) and 96th for judicial independence (SA ranks 24th).

South African investors in such countries may need to turn to bilateral investment treaties for protection from regulatory aggression, without which they will have to rely on "the new paradigm", depending purely on the political will and skill of their government to vindicate their rights behind closed diplomatic doors.

In a secret arena without rules, investor rights are bartered for a basket of unrelated diplomatic goods, such as relaxing visa regulations, extraditing fugitives or supplying weapons.

Ultimately, a bargain is struck, not by evaluating evidence and legal entitlements, but by testing the prevailing balance of power, personalities, and practicalities. Whatever the outcome, the process lacks the lucidity, predictability, and accountability that a just investment regime requires.

It is not known what bargains were struck in Abuja, nor what political price the South African government was prepared to pay, if any, to tame Nigeria’s regulators. The fate of MTN’s fine, once it becomes clear, may provide a clue.

The latest lifting of its suspension from Nigeria’s regulatory services may even signal a breakthrough brokered during Zuma’s trip. But SA’s outbound investors will still be left to wonder whether their government will always go to the necessary lengths, if any at all, to protect their interests abroad, or whether they are better off relying on rules-based bilateral investment treaties while they still can.