The secretary-general of the Energy Charter Treaty has had a great vision: to make the treaty a global “golden standard” for energy investment and transit rules – and an indispensable tool for securing private investment that is needed for success in the green transition. Since 2012, the secretariat has made systematic efforts to expand the treaty in the global south, not least in Africa.
When representatives of the Energy Charter Treaty secretariat reached out to the authorities in South Africa, however, they were turned away, according to Mustaqeem de Gama, Counsellor at the South African Mission in Geneva, accredited to the World Trade Organization and the United Nations. He previously worked at the Department of Trade and Industry in South Africa, where he headed the International Trade and Investment Directorate.
“They had wanted to start a process of review, part of it being the expansion dialogue. The Energy Charter Treaty is bad news as far as my government is concerned, and this is why we did the investment reform. I was the principal drafter of the new Investment Act, which essentially refocuses this on a national level”, he tells Investigate Europe.
South Africa is among a handful of major countries in the global south that are critical towards the system of investment treaties in general.
“It is a really bad idea for any African country to consider signing up to this particular treaty”
“We have a lot of concerns. We are not party to the so-called ICSID convention. Firstly because of sovereignty concerns, but we also have a constitutional mandate. Our constitution balances the rights and obligations between state and non-state parties.
During my time as head of legal affairs of the South African government on investment treaties and litigation, we were very clear we would not consider joining the ECT nor the ICSID convention. We would legislate for these on a national level.“
This attitude led the South African government to cancel a number of investment treaties with European countries that allowed for companies to sue the respective states. This clearly indicates that South Africa is not willing to enter into investor-state arbitration, says de Gama.
“Given the fact that we are constrained in terms of energy generation and also trying to transition into a green economy, we think it is on the part of governments, to first ascertain what the impact of any initiative will be our rights and obligations as a sovereign.”
Why is it not in your interest to join the ECT nor have bilateral investment treaties that include such arbitration clauses?
This system is very much driven by commercial interest of companies. It was designed based on certain concerns; the lack of applicable rules, and the lack of rule of law. But in this modern age most of us have gone through law reform. So we are very much on par with any rule of law development across the world.
Investors from developed countries investing in developing countries had concerns that they would not be treated fairly. As a result, you find doctrines within these treaties, like fair and equitable treatment, and rules around expropriation that go way beyond the intended issues to be covered under such treaties. A concern would be if an investor invests and a government expropriates its property, would the investor be compensated? The answer is yes, you would be compensated. There are clear rules around compensation for expropriation.
How do the rules go beyond the intended issue?
No two treaties are alike. They take a particular position, and expand on the obligations of governments. Such treaties impose many more obligations to compensate, not only for direct expropriation, but also for indirect expropriation.
If you devalue your currency, it doesn´t do direct damage on the particular investor since this measure applies generally to everyone. But in the end, if the investment is made less profitable, some will definitely try to institute a claim. This is all part and parcel of the risk of doing business, and companies can reinsure against this by taking out particular types of risk insurance. Nevertheless, governments are made to pay in such instances for legitimate public interest measures.
“Governments are made to pay for legitimate public interest measures”
If governments take measures in the public interest, many of these treaties and bilateral mechanisms do not recognize the legal basis of such measures as an affirmative defense against claims. When Germany, Spain and others tried to move away from less sustainable to more sustainable energy solutions, there were cases brought under the Energy Charter Treaty. It is just an unacceptable risk that governments face. It would not be a good idea to sign on to these particular treaties.
Now there is a modernisation process in the ECT. Do you support that?
If treaties are reformed, it is a different question. My government is not averse to an investment contract with an individual investor that is presented with full knowledge of what the investment brings and what the obligations of the government are. Moving from a non-exact mechanism to a more exact one makes the whole transparency process of any investment much easier to understand, and does not expose the fiscal purse to any unacceptable risk that may not be worth the investment at all.
We have to provide for situations where things go wrong. But our experience is that investors want certainty. We have had cases that went to dispute, but in the last few years we have mostly been able to avoid going to any disputes based on alternative approaches including dispute avoidance mechanisms.
How has South Africa’s cancellation of bilateral investment treaties (BITs) with EU countries affected your ability to attract foreign investors?
It hasn’t affected our ability to attract investment.
We signaled that we wanted to cancel these treaties in the middle of the financial meltdown. In the three years before 2015, there was a global downturn of investment flows to developing countries because of the financial crisis. But South Africa did as well or even better than most similarly situated countries, like Turkey and Brazil.
We also signaled with our cancellation that we would stabilize domestic regulation; with trade facilitation, one-stop shops, improvement of business environment, and making processes better, more transparent and faster. We worked with the World Bank on these core aspects to improve our business environment.
“Cancelling investment treaties has not affected our ability to attract investment”
So the ability to attract investment has less to do with bilateral investment treaties in place, than having clear systems in place that give investors certainty they need. This incentivised investors on a broader scale. We found that even existing investors were able to reinvest, big corporations and employers like Mercedes Benz, Ford and BMW.
Is it true that if these treaties were abolished, you would have even less transparency into what goes on between a government and a corporation — since investors anyway would have contracts with governments that would be secret?
The treaties themselves are vehicles that can be abused on both sides. Treaties could suppress information made available about a particular company. If you go into an investment dispute, all proceedings are confidential because they are based on arbitration – unless it is agreed by the parties to information can be disclosed.
But if you only go on a contract basis, that may also not be in the best interest of the public. So you have to create a balance, with a public register of all contracts entered into, having transparency in terms of reporting mechanisms that companies have to comply with. There are many ways to achieve this kind of transparency, including any obligation that an investor undertakes.
In the UNICTRAL reform process, there is greater transparency in terms of conflict of interest and other issues. We also understand that business confidentiality should be protected insofar as it relates to the commercial viability of the business. But there is always a balance to be struck.
Would South Africa support a reform of the investor-state dispute settlement system in the UN Commission on International Trade Law (UNCITRAL), or do you prefer to abolish the system?
We think that international law has a place. The Uncitral process underway could be supported, depending on which direction it goes. We prefer the rules themselves to be reformed, but current processes are more about transparency, and the possible establishment of a world arbitration court – without fixing the rules.
You have to turn a new leaf to go from one page to another page. If these leaves are in the same book, what is the sense? You have to clarify how rules apply. If you don’t change them substantively, it makes no sense to go through the process; in the end, if the substance differs, you will not reach a global outcome that will cover everyone.
We also think that national systems should feed into regional systems, and regional systems should feed into international systems. We have been a big advocate for regional communities in Africa to clarify their investment rules, because all of us are in different situations. Taiwan does not have the same legal infrastructure as Zimbabwe, or South Africa, or Namibia. Namibia for example is rural, agricultural economy and dominated by mining and fisheries income. This means that any investment structure in Namibia would look very different to one in Singapore or Taiwan, which are not primary producers of commodities. A one-size-fits-all approach is inappropriate. All of us would need some flexibility, with some common rules to create predictability.
Is it correct that South Africa wants a system that commits every company to first exploit the domestic court system before any case is allowed to go to international arbitration?
Yes. That is the bottom line. In many cases a company invests in a country, and at the first sign of trouble, they declare an international dispute. They basically circumvent local legal proceedings. There are issues regarding domestic procedures. But there should be some kind of local process.
We may get a letter from a foreign lawyer, saying you did x, y and z to our client. But the client has never come to us. Today we have a mandatory minimum period during which the parties have to talk, a so-called cooling-off period. Usually we are able to resolve most things during that period.
So it is not that we don’t allow international arbitration. But we obligate investors to first notify the relevant authorities, and then we have an informal process where the line function ministry will try to resolve the issue. As I said earlier, state-to-state arbitration is not ruled out.
Since we cancelled our BITs and implemented a mediation strategy, we have had a lot of success with the companies. In many cases we have had mutually beneficial outcomes by sitting down and talking about the issues. Dispute avoidance strategies are the most important when it comes to sustainable investment and ensuring predictability. We also find that most investors don’t really want to go to any dispute phase, because it is not in their best longterm interest. Preservation of relationships is also very important.
But South Africa has a history of being the epicentre of legal conflict between government and corporations, from the aids global epidemic. Now, this sounds almost like a cosy relationship?
No. But you have to be rational even on sensitive issues. We have had a contentious dialogue for the last 20-25 years, on the access to medicines side as well. But we have never thrown the baby out with the bath water, we have always been rational in how we approach these things.
South Africa was the epicenter, or the start, of this really big clash of paradigms. The World Trade Organization had established certain standards for patent protection which raised the question of how to balance the rights of individuals against the rights of a society. South Africa has been a case study for the impact for these WTO rules. This led to certain processes in WTO, including the Doha declaration on intellectual property and public health, which clarified that countries can take steps in the interest of their population to address medical problems that they face.
South Africa has a very long connection with that dialogue. I wouldn’t say that we are putting a good spin on it. But we have applied long-term rationality. You cannot have emotional reactions to realities that require parties to cooperate.
The ECT has made efforts since 2012 to expand the treaty, especially to countries in Africa. No one has yet ratified, but many are in a process towards that point. Is there any good reason for any African country to enter this treaty?
No. We have our own regional treaty emerging; the Continental African Free Trade Agreement. It brings all African countries together and creates one free-trade space. There is a second phase that tries to consolidate investment rules.
It is better for us to focus on our regional requirements that are more focused and tailored to the needs of our various members. We are looking at regional autonomy and flexibility. You wouldn’t want an LDC – a least developed country – to undertake the same obligation, but for members to work together in cooperative way.
The ECT doesn’t recognize these particular exceptions based on level of development. It is a really bad idea for any African country to consider signing up to this particular treaty.
Then there is the green transformation?
To what extent would this be in our best interest, considering green economy and sustainable development goals? The treaty goes way beyond energy such as oil. We are also producers of other input to critical fusion processes, such as uranium and palladium, as well as many metals required in the high-tech industries, for instance for chipmakers. This imposes further restrictions and obligations on countries that may close off policy space available to them.
So I don’t think it is in the best interest of any African country to join the expansion of the ECT. Focusing on regional and national objectives is better than joining an international, nondescript treaty.
We have long experience with mining companies. In one famous case, and where we prevailed in the end, we took steps to transform the mining sector to reflect the demographic of the country. We wanted to empower communities that had been disadvantaged; historically black communities, using affirmative action. This was opposed. The treaty interacts with a whole lot of other policy objectives that countries in transition should not expose themselves to.
Why, then, do many of these countries consider joining?
It is a false narrative saying if you want to attract business, you need a treaty. But companies even invest in war zones if they have calculated that they will still make a profit.
If you want quality investment that will be good for the economy, don’t go for these kinds of treaties. If you want to attract any type investor, go ahead, you will suffer the consequences of such action. Countries need to carefully plan taking account of their economic needs and design development and investment plans around such a blueprint. You have to decide where you want the economy to go, what types of investments you want to attract, and what measures you are willing to put in place.
Countries considering signing up for the ECT are misinformed. Just like many of us were misinformed about bilateral investment treaties. It was said that if you sign this treaty, money will stream in, investors will come in droves. This never happened. We have to be more critical of the intention and the narrative of the so-called benefits of these treaties.
What traction does South Africa have in the global discussion about ISDS?
From a global south perspective, we have set a precedent followed by others, such as Brazil. Now India, Indonesia, Sri Lanka, and Nigeria are also looking at alternative ways of attracting and managing investment. We have been quite instrumental in changing the way especially countries in the south think of it.
But we have to be careful. We are not only capital importing countries, we also export capital. So we have to maintain a balance and work with the international framework so that we can benefit from minimum standards of protection. That’s why we have to stay engaged in the processes to reform the system and try to make it more inclusive.
Tables have turned in the last 10-15 years. Most of the investment disputes were against developing countries, now 40 percent and more are directed at developed countries.
This is one consequence of an unmitigated system that allows rules to be dictated by private parties. States are now realising that you don’t just negotiate a treaty, you actively have to manage it. There is a greater onus on governments to ensure that these treaties really serve the public interest, but also that they can also be used to protect private rights where there are genuine situations of abuse, which we know in the real world also exist.