Month: December 2013

Why South Africa has ripped up foreign investment deals

This piece was originally published on The Conversation at https://theconversation.com/why-south-africa-has-ripped-up-foreign-investment-deals-20868

Over the past few months, South Africa’s government has cancelled foreign investment treaties with Germany, Belgium and Luxembourg, Switzerland, Spain and the Netherlands. The reasoning behind this tells us much about modern patterns of trade and development. As the nation looks to move on from the loss of Nelson Mandela, these moves to regain control over foreign investment will prove valuable.

Cancelling the treaties caused panic in South Africa’s mainstream business press and also led to the EU’s trade commissioner expressing his concern about the impact this might have on future investment in the country.

But South Africa is not acting alone. These moves represent part of a broader change of opinion among many developing countries towards investment treaties. It is no wonder when you consider large western companies are increasingly using the deals to launch legal challenges against developing countries in which they operate. The decision by arbitrators to award US$1.77 billion to Occidental Petroleum (an American oil corporation) in a case against Ecuador has spooked many developing countries.

The problem with these deals is they lock-in the rights of foreign investors. South Africa’s decision to terminate them will open up welcome space for the government to balance domestic development with the rights of overseas firms.

Firms over states

Bilateral Investment Treaties (known as BITs) are agreements between states that ensure a range of protections for transnational corporations. Crucially, they all include mechanisms for settling disputes between states and investor companies which, unlike the World Trade Organisation, allow firms to bring legal cases directly against states.

If a multinational company claims a state has seized its property in the “public interest”, under the terms of a bilateral investment treaty this dispute would then be resolved by international tribunals rather than national courts. The advantage these deals give to corporations over weaker states is clear.

Given that attempts to negotiate global investment rules collapsed years ago, bilateral treaties remain the main international legal mechanism for protecting the rights of multinationals. UN data suggests there are nearly 3,000 such deals in existence and nearly half of these will be due for renegotiation by the end of 2013.

In the post-apartheid years the ANC-led government sought to attract further foreign investment to the country, following the dominant neoliberal ideas of the time. The mid-90s saw South Africa sign a number of investment treaties with partner countries including 13 with current EU member states. This was a period when the number of treaties rose substantially across the globe, and South Africa felt compelled to compete with other potential investment locations.

New approaches

In more recent years the government has begun to acknowledge this strategy has failed to resolve South Africa’s socio-economic challenges. More specifically, it began to question investment treaties after investors based in Italy and Luxembourg launched a compensation claim in 2007. It was argued that the government’s Black Economic Empowerment measures in the minerals and energy sectors contravened investors’ rights, and a private settlement was reached in 2010.

Neoliberalism and an open-door stance towards multinational corporations has now been abandoned in favour of a development policy focused on a more strategic role for the state. Over the past few years the country’s “New Growth Path” has sought to create jobs via an active industrial strategy. This entails a specific focus on reviving manufacturing and boosting employment through state-led investment in infrastructure.

However, South Africa is still hamstrung by numerous bilateral trade and investment agreements. With these deals still in place, foreign firms found their advantages written into law, and the government simply did not have the policy space to implement the strategy it would like. It is within this context that the moves away from investment treaties should be understood.

South Africa is still a far from undesirable location for multinationals. Contrary to some recent scaremongering it remains very unlikely that the end of these deals will lead to a wholesale programme of nationalisation, and all existing investments are still protected for a further ten years.

Eventually, the government plans to replace individual deals with a single framework. This proposes, quite reasonably, that foreign and national investors should both be treated equally under South African law. Moreover, corporations are already afforded strong protection in the constitution.

Revoking the treaties removes one of a number of obstacles to South Africa being able to address its development challenges. Whether the government will make effective use of this space to develop policies that can start to address the triple challenge of poverty, unemployment and inequality remains to be seen. But it is space worth having.

Reflections on the Mandela Memorial Service

Tuesday 10th December 2013 saw the Memorial Service for Nelson Mandela held at the FNB stadium on the outskirts of Soweto. Rather unexpectedly, on my part at least, this became a more overtly political event than I was anticipating. Domestic South African politics was definitely not put on hold for the duration of the service. Most notably there were repeated choruses of loud boos aimed at current South African President, Jacob Zuma, from significant sections of the crowd. The biggest cheers seemed to be reserved for Barack Obama but interestingly, former South African President, Thabo Mbeki, was also well received. As a result the MC for the event and Deputy President of the African National Congress (ANC), Cyril Ramaphosa, repeatedly called for discipline from the crowd. Then towards the end of the service, when many had already left the stadium, Desmond Tutu showed his frustration at what he presumably thought was inappropriate behaviour for such an event. A news story in the South African press also suggests that the public broadcaster (SABC) was instructed to ‘cut away’ to try and hide the booing of Zuma.

So why did sections of the crowd react to Zuma in such a fashion? From watching on TV it was clear that some small elements of the crowd were clearly supporters of Julius Malema’s new political party (Economic Freedom Fighters). However, interviews with some members of the crowd broadcast on the BBC World Service suggest those booing came from a much wider constituency. Another report also suggested that sections of the crowd dressed in ANC colours joined in with the booing of Zuma.

So it seems the boos may have reflected a wider sense of disappointment with the performance of the current government and Zuma in particular. Some of the interviewees made direct reference to the accusations of corruption surrounding the upgrade to Zuma’s Nkandla homestead. South Africa’s Mail and Guardian recently published details of the core findings of the public protector’s provisional report on the so-called security upgrades to his home in KwaZulu-Natal, which suggests that the costs escalated from an original estimate of R27 million to R215 million. The provisional decision of the report is that Zuma will have to repay the state and face questions in parliament.

During the post-apartheid era, given that the ANC has been the main route to political power, much of the most significant debate has taken place within the party. In this sense, rifts within the ANC are nothing new. Bitter divisions led to the overthrow of Thabo Mbeki at the ANC’s National Conference in Polokwane in 2007. More recently branches of the ANC within the province of Gauteng (where the memorial service was held) failed in a bid to replace Zuma with Kgalema Motlanthe as ANC President at the Manguang Conference in December 2012.

A lively debate in South Africa has resulted as to whether the memorial service was an appropriate platform for citizens to display their feelings towards Zuma. The whole event clearly had a political agenda. I am sure it was no accident, given the recent focus of South Africa’s foreign policy, that the government gave the platform to the Presidents of Brazil and India and the Vice-President of China but not a single leader from Europe. This was not a funeral and given the frustrations of many, with the lack of socio-economic development and the increase in income inequality within South Africa since 1994, it is perfectly understandable.

How did Zuma respond? He delivered a rather dispassionate account of the familiar history of Mandela’s role in the struggle against apartheid. South African comedian, Trevor Noah, tweeted “did someone write this speech or is Zuma reading a Wikipedia page?”. There was precious little on the way forward for South Africa and in general it highlighted his significant limitations as a leader.

Does this all mean that the ANC will struggle to win the April 2014 election? In a word, no. However, there is clearly a rising tide of dissatisfaction within South Africa if levels of protest, as measured by police statistics, are a reliable indicator. South African academic, Peter Alexander, has called this the ‘rebellion of the poor‘ but what is interesting is that in an academic article published in 2010 he concluded that there was ‘no evidence that Zuma, or the ANC in general, were held responsible for people’s problems’ (Alexander 2010, p. 34)*. Maybe events on Tuesday suggest that the tide is beginning to turn. Nevertheless, an alternative ruling party remains a rather distant prospect.

* Alexander, P., 2010. Rebellion of the poor: South Africa’s service delivery protests – a preliminary analysis. Review of African Political Economy, 37 (123), 25-40.