An uncertain regulatory landscape does not instil confidence in foreign investors. Indeed, the success of the global financial market depends on investment certainty and stability.
As a result, international bodies such as the United Nations and the World Bank involve themselves in ensuring that investor rights everywhere are protected. Responsible governments also strive to ensure their national interests are balanced with the need for fair treatment of foreign investors.
The most common mechanism for achieving this is the Bilateral Investment Treaty, known as ‘a BIT’. A BIT as an agreement made between two countries, containing reciprocal undertakings for the promotion and protection of private investments within the respective territories. It establishes the terms and conditions under which nationals of one country invest in the other, including their rights and protections. BITs offer protection against illegal nationalisation and expropriation of foreign assets and other actions by a signatory.
In simple terms, they provide a basis for claims by an individual person or company against a state. Importantly, BITs aim to avoid turning to national courts for an often expensive and protracted judicial remedy that may also be subject to political or other interference.
Instead, BIT disputes are typically arbitrated by the International Centre for Settlement of Investment Disputes, a World Bank initiative that began operating in 1965. Last year it arbitrated around 80 cases.
Unsurprisingly, there are thousands of BITs in existence, and these are tracked and publicly listed by the Geneva-based United Nations Conference on Trade and Development through its Investment Policy Hub.
A study of South Africa’s entry on the Hub reveals 50 BITs currently listed. Some are signed but not in force (e.g. Ethiopia and Egypt). Some are signed and in force (Mauritius and China), while a number have been terminated (Spain and Argentina). Similarly, Mauritius has 48 BITS listed, including in force agreements with the likes of Germany, France, the UK and China. While Zambia has 15 BITs listed, including in force agreements with countries such as Switzerland and the Netherlands and a number of signed but not in force treaties with the likes of Belgium, Ghana, Egypt, Cuba and China.
Concern at South Africa’s BIT terminations
In the case of South Africa, the BIT terminations are of concern to businesspeople, lawyers and others with an interest in securing and protecting foreign investor rights in the country.
With the activation by the South African government in July 2020 of the controversial Investment Act 22 of 2015, this new piece of legislation replaces the investor protection previously given by the now-terminated BITs.
There is concern – including from the likes of the European Union Chamber of Commerce and Industry of Southern Africa – that foreign investors consequently enjoy less protection than before, a situation that negatively impacts future investment inflows.
In essence, there’s unease that any property expropriation deemed to be for a public purpose or in the public interest, as per Section 25 of the Constitution, may no longer be entitled to ‘prompt, adequate, and effective’ compensation. There is also a lack of clarity around international arbitration of disputes.
Other investor-protection mechanisms
But BIT’s are not the only mechanism designed to protect foreign investment. Participation in the World Trade Organisation (WTO) and its various treaties, for example, provides a measure of protection.
South Africa, as a WTO member, has signed various treaties with nations and economic groupings, including:
- Economic Partnership Agreement with the European Union.
- Agreement between South Africa and the USA regarding mutual assistance between customs administrations.
- SACUM–UK Economic Partnership Agreement between Southern African Customs Union (SACU) member states and Mozambique and the UK.
There are also other agreements. Among them the BRICS accord involving South Africa, Brazil, Russia, India and China. Another is the European Free Trade Association-SACU agreement, involving nations such as Norway and Switzerland.
Double-taxation agreements and tax transparency
Investors, of course, don’t want to be taxed twice on the same investment – once in their home country and once in their investment destination country. To obviate this, many governments have bilateral double-taxation agreements. South Africa, for example, has accords with Australia, Belgium, Brazil, China and Germany, among others. Mauritius and South Africa also have such an agreement, with the island nation also having accords with the likes of India, Guernsey, the UK, China, Zambia, France and Malaysia.
It’s also important to remember that a foreign investment should be for a Bonafide commercial or investment purpose and not to avoid taxation. While many treaties and agreements protect investors, there are also those that protect nations’ tax revenues from devious investors.
The Organisation for Economic Co-operation and Development facilitates the 161-member Global Forum on Transparency and Exchange of Information for Tax Purposes. By working through the forum, member countries implemented robust standards that have prompted an unprecedented level of transparency and co-operation in cross-border tax matters.
Finally, when it comes to investor protection there’s no substitute for due diligence and common sense. Despite its oil riches, investing in an economically devastated and highly corrupt country such as Venezuela, for example, carries enormous investor risk, irrespective of whatever investor agreements may be in place.
Similarly, a failed state such as Libya – with no coherent central government or functioning legal system – would present a level of risk few investors should be willing to take.