Business Report | November 13 2013

EU angry as investment policy levels playing field

By Ann Crotty

Is there something the EU trade guys know that they’re not telling the rest of us? Have they got wind of a dastardly ANC plan to expropriate all European-owned assets in South Africa?

Why else the high level of indignation that has accompanied news that South Africa will not be renewing its bilateral investment treaties (BITs) with European countries? Even allowing for the fact that “high-level indignation” is the default position of diplomats, the reaction does seem a tad overdone.

Part of this might be explained by the apparently off-hand manner in which the Department of Trade and Industry notified the affected countries; but South Africans have got used to this sort of behaviour from the department, why shouldn’t foreigners?

Securing the continued preferential treatment of foreign investors does seem to be at the core of the Europeans’ fuss over the disappearance of BITs.

The Department of Trade and Industry, perhaps rather late in the day, has just published for comment the Promotion and Protection of Investment Bill. Among its objectives the new law, which will apply to foreign investors who are not protected by a BIT, seeks to ensure that all investors – local and foreign – are treated equally.

This is in distinct contrast to BITs, which have two key advantages for foreign investors. First, they give the investors the right to legal recourse against the government for any government action that would adversely affect the value of their investment. BITs give foreigners the right to use international arbitration panels to enforce their claim.

By contrast local investors only have access to the South African courts, tribunals or arbitration facilities. Until the Europeans started making a fuss about having to use the South African facilities, we all thought we had a pretty good legal system. Now, of course, we’re not so sure. Again, do the Europeans know something about our legal system that we don’t but should?

The second distinct advantage of BITs for foreigners relates to the guarantee of compensation at “full market value” in the event of expropriation. The proposed new law will see the treatment of “expropriation” and “compensation” being brought into line with our constitution, according to which property “can only be expropriated in terms of the law of general application, for a public purpose or in the public interest, and expropriation is subject to compensation which must be just and equitable in line with international best practice”, says the department.

It is an unfortunate coincidence all the BITs we are cancelling are with Europeans while only a few years ago we were entering into new BITs with other African countries. This could be adding to European concerns that South Africa no longer regards Europe as its “special friend”.

This recent less friendly attitude is in sharp contrast to the uncertain and slightly obsequious attitude the new South African government had towards its wealthy and powerful trading partners about 16 years ago. Back then the government not only drew up BITs with as many countries as it could, it also opted to be defined as a “developed” nation for World Trade Organisation purposes.

In addition, the government agreed to allow our largest listed companies to transfer their primary listings to London, it sold off the country’s strategically important but underperforming steel giant to Luxembourg-based Mittal, it introduced an excessively litigious US investor to the Telkom monopoly and allowed an asset-stripping Irish company to own 100 percent of South Africa’s largest newspaper group.

These are just some of the value-destroying arrangements our government agreed to in a desperate bid to secure the “approval” of the powerful international investment lobby back in the early days of our democracy.

Having set these value-destroying precedents the government is now pilloried for trying to be a bit more discerning – if one excludes its equally desperate current bid to secure China’s approval.

The reality is that foreign investors may be more or less skilled, more or less risk-averse but in a crucial respect are no different from local investors – they are all under considerable pressure to generate returns for their shareholders. Today’s foreign direct investment is tomorrow’s dividend outflow. Our government should focus on encouraging local investors; the foreigners will follow with or without BITs.