Implication of a Regional Approach to Regulation of Foreign Investment: The

SADC and COMESA Experience

M DE GAMA MISSION OF THE REPUBLIC OF SOUTH AFRICA

7 OCTOBER 2015

Question to be answered

•  What are the regional dimensions of investment protection in Southern Africa and Eastern Africa?

•  What is the scope for regional arrangements to consolidate investment protection in the respective regions and ensure it meets the objectives of sustainable development?

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South-South: Features of IIAs•  South-South IIAs with peculiarities reflecting regional

preferences;•  General features of South-South IIAs:

–  Generally do not create, as a norm, rights of market access or establishment for investments, however COMESA creates phased NT pre-establishment rights;

–  Refrain from prohibiting performance requirements;–  Leave out certain protections traditionally associated

with IIA, e.g. SADC Protocol does not contain a national treatment or protection and security provision

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Legal Framework for Investment Protection

•  National laws and regulations, investment codes; •  State contracts, Investment agreements; •  Bilateral investment treaties (BITs) for the promotion and

protection of investment; •  Double taxation treaties (DTTs); •  Bilateral and regional preferential trade and investment

agreements; •  Multilateral disciplines and specific agreements (WTO

GATS, TRIMs, TRIPs, ICSID, NY Convention, MIGA), but no multilateral agreement

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Recent trends in IIAs •  Highlights rapid proliferation at all levels, including at the

intraregional level•  International investment rules are increasingly being

formulated as part of agreements that encompass a broader range of issues (economic integration agreements)

•  Investment provisions in new agreements tend to be increasingly sophisticated and complex in content, but clarify some issues

•  IIA proliferation has been paralleled by a rise in investor-State disputes

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SADC: Background•  SADC Protocol on Finance and Investment (FIP)

was signed on 18 August 2006;•  SADC Secretariat opined that the FIP entered into

force on 16 April 2010– Based on ratification of at least two thirds of

member states•  SADC Model BIT adopted in 2013•  Currently an ongoing review of the FIP Annex I

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COMESA Common Investment Area

•  Common Market for Eastern and Southern Africa (COMESA) established in 1994;

•  2007 Heads of State adopted the Common Investment Area (CCIA)

•  Key pillars include settlement of investment disputes, national treatment, repatriation of capital, disciplines on expropriation

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Comparative Analysis: ���SADC FIP versus CCIA

•  The two instruments differ in very interesting ways:– Definition of “investment”– Definition of “investor”– National Treatment and Most Favoured Nation

•  Either absent or present in both pre- and post establishment phases

– Dispute settlement options differ

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Substantive Provisions of Annex I of the FIP

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Annex I Cooperation on Investment

•  Annex I is binding on all member states of SADC;•  Contains obligations undertaken by SADC

member states which can be enforced by investors;

•  Contains norms in respect of investment, investor, MFN, expropriation, repatriation of investment and returns, investor-state arbitration

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Definition of “Investor”•  An investor means:

–  “a person that has been admitted to make an investment.”•  Definition too broad and includes any investor from anywhere in the

world–  This includes investors from non-party states (Mistake?)–  None of the major regional integration blocks allow this unilateral

privilege to non-state parties (COMESA, Article 1(4))•  Investor natural person that has citizenship of a Member State•  Juridical person: incorporated in a Member State [substantial business

activity test]

–  Definition potentially give nationals of the host state the right to sue their own country under public international law

•  Currently at least 4 cases instituted against a SADC member states under the FIP

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Definition of Investment•  SADC FIP: Open ended asset-based list that covers all kinds of assets;•  Proviso that a state may exclude short term portfolio assets, however

the definition is so broad that if it does not specifically exclude short term portfolio investment it would be bound to the broad definition;

•  Does not include guidance with regard to the link between an investment and the host economy, as articulated in the famous “Salini” case: in order to qualify as an investment,

–  an asset must have the characteristics of an investment: substantial commitment of capital or other resources, expectation of gain or profit, assumption of risk and a significance for host state development

•  COMESA: Asset based list with exclusions and subject to carve outs under Member State sensitivities list

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Recommendation on Consolidation

•  Limit range of assets considered as investments–  3 options under the SADC Model BIT

•  Enterprise approach (ownership through a legal entity)

•  Open Asset list approach subject to exclusions•  Closed Asset List approach subject to exclusions

•  Recommendation: Enterprise approach

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Consolidation recommendation•  SADC Model BIT recommends that:

–  Definition of investor should be further circumscribed by specifying both natural and legal persons

–  Both categories have tests associated with them, for natural persons nationality or residence requirements, where a natural person is a dual national, predominant nationality or residence test

–  Legal entities subject to substantial economic test•  Legal entities controlled by foreign nationals should not

qualify as a SADC investor

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Expropriation•  SADC FIP:

–  Standard definition that includes reference to payment of “prompt, adequate and effective” compensation

–  Contains no guidance in respect of government action that may not be considered acts of expropriation, including “regulatory takings” for a public purpose

–  Should a tribunal interpret this provision it is likely to find that “fair market value” should be used with no exceptions or limitations

•  COMESA: Standard formulation, fair market value stipulated, payment of interest, free transfer, excludes indirect expropriation in line with police powers

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SADC Model BIT: Article 6: Expropriation-  Follows existing Models (eg. Canadian & US Models)-  Fair and adequate compensation in reasonable time – compensation may not

always be at Fair Market Value (FMV).-  3 options proposed for FMV -  (a) MS determine if fair and adequate compensation = FMV-  (b) FMV used as basis for valuation of damages (favours investor)-  (c) Presumption that FMV is used – State can rebut this based on equitable criteria

set out-  “reasonable period of time” – provides some flexibility in that compensation may

take time based on realities on the ground

Consolidation recommendations

Fair and Equitable Treatment•  SADC FIP: Does not specify the standard of treatment and

tribunals would have to decide whether the customary international law minimum standard applies or a potentially higher independent standard

•  COMESA: Article 14 (2) references customary international law in respect of minimum treatment standard–  Pope and Talbot v Canada: FET is “additive” to minimum standard–  NAFTA FTC Interpretation: Article 1105 of NAFTA rejected the

notion–  CCIA confirms that FTA standard can be equated to international

minimum standard however Article 14(3) creates developmental standard?

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SADC Model BIT: Article 5: Fair & Equitable Treatment (FET)

Due to controversial nature of provision, the Model proposes 2 options: (a) FET – common in BITs, open to broad interpretation, unpredictable

customary international law minimum level: government actions constitute an outrage, in bad faith,, willful neglect of duty… (b) Fair Administrative Treatment – addresses key issues in a carefully restricted manner Option (b) serves objective:-

-  accords investor protection whilst limiting risks of expansive rulings on FET-  focuses on governance standards and not investor rights – aids in interpretation-  sets a high standard of “arbitrary” conduct by a government agency or conduct that

amounts to “denial” of procedural justice or due process

Consolidation recommendation

National Treatment Standard•  SADC FIP: The Annex I does not contain a national

treatment standard [corrected in revision of FIP]•  COMESA:

–  Phased approach to national treatment–  Covers both pre and post establishment modes;–  Subject to like circumstance test–  Subject further to negative list exceptions and

qualifications

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Most Favoured Nation Treatment

•  SADC FIP: Annex 1 limits MFN to FET, however it could be used to import more favourable provisions from other treaties.

•  COMESA: MFN applies immediately–  Extends to pre and post establish–  Subject to like circumstances test–  Does not apply to agreements entered into with “non-

members”

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SADC Model BIT: Article 4: Non-discrimination -  2 Non-discrimination principles in any treaty: (a) National Treatment (NT) (b) Most Favoured Nation (MFN) -  Model recommends excluding MFN – advanced treaties contain

exclusions/inclusions relating to sectors, existing / new measures that may be inconsistent with non-discrimination obligations.

-  “Like circumstances” : ensures a broad approach is taken when considering investments in same / related / competitive sectors.

Consolidation recommendation

Dispute Settlement Provisions•  SADC FIP: provides for exhaustion of local remedies

–  Further jurisdiction for SADC Tribunal–  International Arbitration–  Change in terms of “direct access” for individuals

•  COMESA: provides for various modes of dispute settlement including international arbitration based on a “fork in the road provision”.

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Conclusion•  Consolidate national norms within SADC and

COMESA member states–  Modernisation of investment norms in conjunction with

other liberalisation considerations;– Further integration agenda include

TRIPARTITE FTA which will feature investment protection norms in Phase II;

–  Consolidation at the level of the African Union through the development of a Pan African Investment Code

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