South Africa Revisits Bilateral Investment Agreements

World Investment Report
The European Union is South Africa’s largest trading partner

AFRICANGLOBE – South Africa’s systemic review of its bilateral investment treaties (BITs) has marched this somewhat sterile topic right up the pop charts.

The country in the past three weeks has revoked BITs with Germany and Switzerland, following treaty terminations with Belgium, Spain and the Netherlands. Some other countries have also opted to break out of the regime. Australia is opting out of dispute settlement mechanisms, for instance. Several other countries are weighing their options.

There are several concerns with these treaties. But the system is not all bad. It can serve as a base to enhance predictability and security for foreign investments – much like the World Trade Organization does for trade. But for that to happen a more coherent, streamlined and fairer system needs to be established, otherwise countries will continue to break out.

A priority area for redress is the BIT regime’s compatibility with the development agenda. To an extent, investment treaties “freeze” a country’s legislative environment for foreign investors. This puts the treaties at odds with evolving sustainable development objectives. Some other concerns stem from provisions that are phrased in terms that are too general, or are not properly defined, and are therefore open to broad interpretation that may undermine developmental objectives.

The second problem is the investor-State dispute settlement (ISDS) mechanism. The allowance under investment treaties for private investors to sue States is unusual. In the WTO disputes can only be initiated by States. Moreover, whereas WTO panels can at most order erring countries to align their rules with their WTO commitments, States under investment disputes may be liable to costly awards against them. Last year a record award of $1.77bn was made against Ecuador, in a case brought by Occidental Petroleum Company of the US.

With access to ISDS an attractive feature, the number of investment suits has spiked. A cumulative 514 investment cases have been brought – compared to the 405 cases heard in the WTO. It is not to say investment disputes do not often have merits, but this system may serve as an incentive for investors to adopt creative means to gain access to ISDS and refer disputes to arbitration even when not strictly necessary.

There is also wide recognition that the arbitration process has flaws: arbitral findings, for instance, are sometimes inconsistent, which means divergent legal interpretations of similar provisions exit, undermining the predictability of the system. Moreover, no well-functioning appeals option is available. Because arbitration may result in costly findings against States it is not unreasonable to expect that it should function properly.

The acknowledgment of the system’s weaknesses has spurred change. Most new investment agreements negotiated these days simply don’t resemble the first generation BITs. Today’s treaties clarify provisions or give narrow definitions for terms such as “investment”, “fair and equitable treatment” and “expropriation” to better guide tribunals on treaty makers’ intent. The new treaties even provide for sustainable development and corporate social responsibility elements. Generally they strive to better balance the rights of investors and the obligations imposed on States.

But that does not solve the problem, because the current body of investment law continues to exist. And exist in the thousands. The international investment regime comprises just under 3,200 BITs – a bloated network of treaties, characterized by complexity and incoherence.

Instead of the piecemeal reforms induced by individual countries’ actions, a comprehensive multilateral review of the international investment regime would be far more useful to address systemic deficiencies, while strengthening its positive contribution to provide a stable regulatory environment for investment.

In the absence of a multilateral body to spearhead change, options for reform seemed bleakly absent until recently. However, two concurrent developments have opened the doors of opportunity.

The first stems from an increasing trend for countries to negotiate multiparty investment agreements within or between regions. Right now, 22 such regional negotiations are under way, involving 110 countries. This rising regionalism presents a valuable chance to streamline the system. If the negotiators of these regional pacts opt to replace existing BITs between all parties with a single regional treaty, this would be a giant step towards regime consolidation.

The second opportunity for reform is the one South Africa is using. Many countries have accumulated a stock of BITs concluded in the 1990s, whose expiration dates are now falling due. Expiry of the initial treaty term gives countries options to review, renegotiate or revoke.

According to an UNCTAD analysis, more than 1,300 treaties (40 per cent of the current BIT network) will have reached maturity by the end of this year. This constitutes a stunning opportunity to update and modernize. It is that rare opportunity for countries to decide what they want from foreign direct investment (FDI) and refine treaties accordingly. This is the chance to align investment policy with environmental objectives and labour standards. It is also the moment to construct a more responsible investor-State dispute settlement mechanism.

The best forum for such an overhaul would be a multilateral one. The dynamics of multi-stakeholder engagements will ensure that the interests of all parties involved are catered for and yield fairer and more balanced outcomes. A multiparty approach would also transcend narrow interests and more effectively address broader social, economic, environmental and developmental challenges.

The appetite for a multilateral investment agreement is absent. There is, nonetheless, a compelling argument to be made for incremental multilateralism. In the absence of a formal supranational institutional framework to spearhead this debate, UNCTAD has drafted anInvestment Policy Framework for Sustainable Development [PDF] as an attempt to provide a road map. But we will reach further, faster, through a formal multilateral process.

South Africa’s reframing of investment protection shows there are ways to improve the system. The hope is that current developments spur a multilateral moment for the investment system. The world indeed needs an updated regime that heeds sustainable development imperatives.


James Zhan is Director of the Investment and Enterprise Division at the United Nations Conference on Trade and Development (UNCTAD). He leads the team that produces the World Investment Report.