Will Africa Be Lit By “BITs”?

January 8, 2014

The South African government may well have been surprised when Italian mining companies launched legal action challenging mining legislation aimed at addressing certain historical injustices in South African society – measures that were taken to promote human rights. Similarly, the environmental protection the City of Hamburg administration had in mind when imposing restrictions on a coal-fired power plant along the banks of River Elbe also led to a dispute: the Swedish company constructing the power plant claimed its interests had been harmed.

In recent years, foreign investors have  brought multiple cases against governments claiming billions of dollars in compensation when governments changed their fiscal laws, banned certain chemicals, revised their energy policies, or even when they tried to phase out nuclear power to avoid another Fukushima crisis. These investors did so by relying on "investment treaties" signed by many countries around the world and which give investors the right to claim against the signatory state. Such treaties exceed 3,000 in number today. The exponential increase in the number of investment disputes shows a high level of treaty awareness amongst investors and their advisors, and suggests a need to generate further awareness within governments. Lawmakers need to be aware that they cannot always legislate without considering the possible external consequences of their proposed new laws.

Africa is one of those now in the forefront of foreign direct investment ("FDI"). According to the UNCTAD 2013 World Investment Report, FDI inflows to Africa rose to USD 50 billion in 2012, making it one of the few regions in the world that registered year-on-year growth. It is expected to experience continued growth in FDI given the positive economic outlook in major countries such as Ghana, Nigeria, Ivory Coast, Angola, Ethiopia, Mozambique, Zambia, Tanzania, South Africa and Congo. There is increasing global demand placed on Africa’s abundant resources. More than half of Africa’s population is aged under 20. Within three decades, Africa will have a larger working population than China. All of these factors ensure that Africa remains a very attractive territory yet to be fully explored by divergent foreign investors.

This article aims at briefly introducing the investment treaty system and underscoring why it is important to be "in the know" from Africa’s perspective.

So, what are these investment treaties?

An investment treaty is usually signed between two states i.e. a "bilateral investment treaty" or a "BIT" although it can also be on a multilateral basis like NAFTA or the Energy Charter Treaty. Investment treaties are aimed at promoting investments between the states and providing the investors of these states with basic safeguards against expropriation, unfair or inequitable treatment or discrimination among other adverse measures in the host state receiving the foreign investment. These treaty protections are often more favourable to investors than those found in national law. More importantly, under many of these treaties investors of a contracting state can directly bring a claim against the other signatory state hosting the investment before a privately selected international arbitration tribunal.

Compared to the option to sue the host state in its own courts before state appointed judges, the possibility of appearing before a neutral i.e. international tribunal is often very attractive to an investor if it believes the host state has breached its rights. 

Why do states take on this potential liability?

The answer is simple: to attract foreign investment. Unlike one-off commercial transactions, foreign investments involve substantial long-term commitments to the host country. Foreign investors are susceptible to political, legal and cultural influences in that country that can be accompanied by high levels of risk. Often, they have to make substantial funds available at the outset of their projects hoping to recuperate profits only decades later. This long-term relationship combined with the size of the commitments make foreign investments particularly prone to disputes and investors do not want to enter a market before they get certain reassurances from the host state. These reassurances can be given via domestic investment laws or specific investment agreements with foreign investors. But BITs or multilateral treaties are more attractive to investors because they provide additional protection under international law coupled with the option of international arbitration if things go wrong.

Where can an investor sue the state?

Where investors can sue depends upon the language of the BIT in question. Many BITs turn to the International Centre for Settlement of Investment Disputes ("ICSID"), part of the World Bank group, thanks to the self-contained system of arbitration established under its own rules and ease of enforcement of awards. Like many countries in the world, the majority of African states are party to the Convention establishing the ICSID framework and have promised to recognise and enforce ICSID awards as if they were final judgments of their national courts.

But ICSID is not the only game in town. International centres like the ICC and LCIA, among others, may be referred to in treaties, as well as ad-hoc arbitration under the UNCITRAL Arbitration Rules. Foreign investors can sue in the host state courts too and under some treaties are required to do so first, as a condition to arbitration. However, in a number of jurisdictions a perceived fear of lack of impartiality and independence from political bias or pressure dissuades them from going before the host state courts.  

What are the protections under BITs?

So far, BITs have been effective tools in protecting investors from:

• Expropriation: This ranges from direct nationalisation or an outright taking of investors’ property to indirect destruction or diminution of investments’ value through state measures without adequate compensation.

The following are examples where African states have been found liable for expropriation:

• The Mugabe regime compulsorily acquiring commercial farms for resettlement[1];
• The Congolese authorities nationalising a joint venture bottling facility by military occupation and imprisoning its employees[2];
• The imposition of an export ban by the Central African Republic on an investor’s tobacco stock to recover tax debts[3]; and
• The withdrawal of tax exemptions granted to an investor operating the water and sewage network in Tanzania, the usurpation of control of its assets and deportation of its senior management from the country.[4]

Outside Africa, other awards worth noting are a 2005 award of USD 269 million in damages against the Czech Republic for causing an investor to surrender its TV broadcasting license[5], and a 2012 record award of USD 1.77 billion against Ecuador for expropriating an investor’s oil development rights through tax measures[6]. 

• Unfair or inequitable treatment: A host state can be liable to foreign investors if its conduct is held to be arbitrary, grossly unfair, idiosyncratic, or involves a lack of due process, predictability or transparency.

Egypt’s failure to respect its courts’ rulings in favour of an investor and its denial of justice to the investor[7]; or Burundi’s breach of an investor’s legitimate expectations when Burundi restricted export of golden ore in violation of its contract with the investor[8] are examples of conduct where state liability has been established. Other international tribunals have interpreted these terms to mean that a government must provide a stable and predictable regulatory environment. On this basis, they have ordered governments to pay compensation to investors who claimed that changes in regulations or tax policies had made their investments less valuable. The most famous example is Argentina’s "pesification laws", eliminating the policy that pegged pesos to US dollars and converting investors’ US dollar obligations to rapidly deteriorating pesos following its economic crisis.

• Failure to accord full protection and security: This is to ensure that states take active measures to protect investments from physical damage and other adverse effects by private parties or from the state organs. For example, when the commercial premises of AMT were destroyed twice by looting soldiers of the Zairian army it was enough for Zaire to be held liable for failing to protect the foreign investment.[9]

• Unreasonable or discriminatory measures: Host states cannot favour local competitors over foreigners by using their regulatory or fiscal powers or differentiate between investors unreasonably. Most BITs contain specific standards of non-discrimination based on nationality including most-favoured-nation clauses and national treatment. No African state has yet been held liable in reported decisions directly for breach of non-discrimination obligations, but there are abundant examples elsewhere in the world. The Czech Republic, when it provided state aid only to domestically-owned ailing banks excluding the one held by Dutch investors, was held to have acted discriminatorily.[10] Argentina’s crisis regulation measures falling disproportionately on the largely foreign owned gas sector also did not escape bringing about Argentina’s liability.[11]

BITs also commonly include guarantees for the free transfer of funds in connection with the investment as well as a general obligation to comply with any contractual obligations that the state has undertaken vis-à-vis the investor.

Investor-State Arbitration Landscape Today

While investment disputes have arisen in a variety of contexts, traditionally many of them have been between developing countries from former Soviet Union, Africa and Latin America and western investors.

In the past, BITs have been seen as a creature of the West to protect investments abroad, but this is no longer the case. There are a number of cases where intra-continental fights are staged and where western nations have been sued by investors from emerging markets. For example, in 2011 a Chinese company, Ping An Life Insurance, sued the Belgian government for its financial restructuring measures. Greece and Cyprus have been struck with investment claims following their bailouts. Spain is having particular trouble in its renewable energy sector, fighting challenges by photovoltaic, solar thermal and wind power investors.

Just defending such claims is costly. The Philippines is reported to have spent USD 58 million defending two cases against German airport operator Fraport which, allegedly, could have paid the salaries of 12,500 teachers for one year.

All this does not mean that it is only bad news for states, or that they are likely to lose in a forum that some have accused of being imposed on them by the West. So far, investors have only won approximately 30% of reported cases -with a similar percentage accounting for settlements- while states prevailed in the remaining cases. The staggering cost of launching a lawsuit against a state with a significant amount of money at risk should make investors less keen to bring frivolous actions. Unlike commercial arbitrations, traditionally investment treaty tribunals have ordered the parties to share the costs equally or bear their own costs. But there is increasing support in the investment arbitration community for the tribunals to order the loser to pay the winner’s costs, meaning that an unsuccessful investor risks paying the government’s legal fees.

Where does Africa stand?

There are over 750 African BITs today and almost 100 ICSID cases have been brought against African countries. Their track record in these proceedings very much follows international figures: In only 25 % of these cases were the investors’ claims upheld compared to a 35 % success rate on the states’ side. 

As has been widely reported, Bolivia, Ecuador and Venezuela have all pulled out of the ICSID system in recent years. This view has not been restricted to emerging markets with Australia announcing that it would not include investor-state arbitration in future trade agreements. Investors will not leave Australia even without that- it has reliable courts and rich natural resources. The same may not be true for Bolivia, Ecuador and Venezuela. On the other hand, Brazil is generally seen as an investment-friendly destination without having ratified a single BIT. All in all, it seems difficult to pin down the correlation between BITs and success in attracting foreign investment. Perhaps it is the case that where the rewards are clear or the political risks are fairly low (as is arguably the case in Brazil) investors can live without them, but where there is less stability or particularly higher risks, investors will insist upon the protection they offer.

Whatever the view, BITs remain a vital part of the investment landscape in Africa and are likely to continue to do so. Well-advised investors will seek to ensure they can enjoy the protection those treaties offer, and well-advised governments should be equally alive to the obligations they generate and the potential liabilities that may arise.

   [1]   Funnekotter v Zimbabwe, Award, 2009 under the Netherlands-Zimbabwe BIT.

 

Gibson, Dunn & Crutcher’s lawyers are available to assist in addressing any questions you may have regarding these issues.  Please contact the Gibson Dunn lawyer with whom you usually work, or the following:

Cyrus Benson – London (+44 (0)20 7071 4239, [email protected])
Penny Madden – London (+44 (0)20 7071 4226, [email protected])
Ceyda Knoebel – London (+44 (0)20 7071 4243, [email protected])

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