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BILATERAL INVESTMENT TREATIES ENCOURAGING FOREIGN DIRECT INVESTMENT: ZIMBABWE –SOUTH AFRICA BIPPA AS A CASE STUDY. ` BILATERAL INVESTMENT TREATIES ENCOURAGING FOREIGN DIRECT INVESTMENT: ZIMBABWE –SOUTH AFRICA BIPPA AS A CASE STUDY. BY BANDERA EDWICK 29722919 Supervisor: Professor Danny Bradlow SUBMITTED IN PARTIAL FULFILLMENT OF THE DEGREE LLM IN INTERNATIONAL TRADE AND INVESTMENT LAW IN AFRICA 1 © University of Pretoria
BILATERAL INVESTMENT TREATIES ENCOURAGING FOREIGN DIRECT INVESTMENT: ZIMBABWE –SOUTH AFRICA BIPPA AS A CASE STUDY. Undertaking “I undertake that all material presented for examination is my own work and has not been written for me, in whole or in part, by any other person(s).I also undertake that any quotation or paraphrase from published or unpublished work of another person has been dully acknowledged in the work which I present for examination”. EDWICK BANDERA 2 BILATERAL INVESTMENT TREATIES ENCOURAGING FOREIGN DIRECT INVESTMENT: ZIMBABWE –SOUTH AFRICA BIPPA AS A CASE STUDY. Contents Acknowledgements ....................................................................................................................................... 5 LIST OF ABBREVIATIONS ....................................................................................................................... 6 Abstract ......................................................................................................................................................... 7 1.1 The history behind signing of BIPPA ............................................................................................... 8 The problem statement ............................................................................................................................ 13 1.2 Hypothesis and Research Questions ............................................................................................... 14 1.3 Significance of the study ................................................................................................................. 15 1.4 Definition of Concepts .................................................................................................................... 15 Bilateral Investment Treaties .............................................................................................................. 15 Foreign direct investment ................................................................................................................... 15 1.5 Research Methodology ................................................................................................................... 16 1.6 Delineations and Limitations of the study ...................................................................................... 16 1.7 Literature Review ............................................................................................................................ 17 1.8 Preliminary Chapter overview ........................................................................................................ 20 CHAPTER TWO ........................................................................................................................................ 22 Introduction ............................................................................................................................................. 22 The History of Bilateral Investment Treaties .............................................................................................. 23 The Aims of Bilateral Investment Treaties ................................................................................................. 26 Features of Bilateral Investment Treaties ................................................................................................... 27 The interlink between BIT and FDI ............................................................................................................ 29 CHAPTER THREE .................................................................................................................................... 37 Introduction ................................................................................................................................................. 37 Scope of the Application of BIPPA ............................................................................................................ 39 Admission and Establishment ..................................................................................................................... 43 Treatment of Investments ........................................................................................................................... 44 Fair and Equitable treatment ................................................................................................................... 44 National treatment and Most Favored Treatment ................................................................................... 45 Compensation of loses ............................................................................................................................ 46 Expropriation .......................................................................................................................................... 47 Transfers of Investments and Returns ..................................................................................................... 50 3 BILATERAL INVESTMENT TREATIES ENCOURAGING FOREIGN DIRECT INVESTMENT: ZIMBABWE –SOUTH AFRICA BIPPA AS A CASE STUDY. Dispute Settlement Provision .................................................................................................................. 51 Applicable laws to BIPPA ...................................................................................................................... 52 Chapter 4 ..................................................................................................................................................... 57 Introduction ................................................................................................................................................. 57 Sovereignty Limitations .......................................................................................................................... 57 Zimbabwe Indigenization and Economic Empowerment Regulation ..................................................... 58 Arbitration repercussions ........................................................................................................................ 64 Reputational concerns ............................................................................................................................ 65 CHAPTER FIVE ........................................................................................................................................ 67 Conclusions ............................................................................................................................................. 67 Recommendations ................................................................................................................................... 68 BIBLIOGRAPHY ....................................................................................................................................... 72 Books ...................................................................................................................................................... 72 Case law .................................................................................................................................................. 72 Internet sources ....................................................................................................................................... 73 Journals ................................................................................................................................................... 74 Legislation............................................................................................................................................... 76 Treaties .................................................................................................................................................... 76 Other ....................................................................................................................................................... 77 Magazines .................................................................................................. Error! Bookmark not defined. Papers ...................................................................................................................................................... 77 Reference ................................................................................................... Error! Bookmark not defined. 4 BILATERAL INVESTMENT TREATIES ENCOURAGING FOREIGN DIRECT INVESTMENT: ZIMBABWE –SOUTH AFRICA BIPPA AS A CASE STUDY. Acknowledgements
I thank the Almighty GOD for taking me this far
In Memory of my late mother and father
My special thanks to all friends and relatives for the support and encouragement during this
period of my studies. To the following I express my sincere gratitude for the different special
roles they have played in my studies; Edna, Cathrine, River, Osbourne Majuru and Ronnie.
I wish to thank Professor Bradlow, Rafia Da Gama and Emily Laubscher for all the guidance and
encouragement throughout the period of my studies at the University of Pretoria.
To all the LMM students (2009) of International Trade and Investment, and Viola thanks for
giving me the last push.
5 BILATERAL INVESTMENT TREATIES ENCOURAGING FOREIGN DIRECT INVESTMENT: ZIMBABWE –SOUTH AFRICA BIPPA AS A CASE STUDY. LIST OF ABBREVIATIONS
Broad based Black Economic Empowerment (BEE)
Bilateral Investment Promotion and Protection Agreement (BIPPA )
Bilateral Investment Treaties (BIT)
Friendship commerce and Navigation treaties (FCN)
Foreign Direct Investment (FDI)
Goss domestic product (GDP)
International Monetary Fund (IMF)
Land Acquisition (LAA)
Southern African Development Community (SADC)
Most Favoured Nation (MFN)
North American Free Trade Agreement (NAFTA)
Organization of Economic Cooperation and Development (OECD
United Nations Conference on Trade and Development (UNCTAD)
International Centre for The settlement of Investment of Investment Disputes (ICSID)
United Nations Commission on International Trade Law (UNICITRAL).
6 BILATERAL INVESTMENT TREATIES ENCOURAGING FOREIGN DIRECT INVESTMENT: ZIMBABWE –SOUTH AFRICA BIPPA AS A CASE STUDY. Abstract
The main ambit of this research is to seek to find a link between bilateral investment treaties and
foreign direct investment. This offers a contribution on the ongoing debate on the effect of
bilateral investment treaties on foreign direct investment. In order to analyze this debatable role
of bilateral investment treaties on foreign direct investment a case study of the recently signed
Bilateral Investment and Promotion and Protection Act between Zimbabwe and South Africa
(BIPPA) is carried out with a special focus on Zimbabwe. The argument is BIPPA contains many
rights which investors can use against the host. These clear outlined rules increase investor
confident which will result in flows of investments to the host nation. The rules have a
disciplinary effect upon the host. This is further qualified by the notion that BIPPA will have
more effect on the Zimbabwean side were the government have to convince investors that their
property will be protected. Domestic policies will be highlighted as being in conflict with
investors rights. BIPPA can thus be used as shield to these domestic policies thereby
encouraging foreign direct investment. These treaties however have their own cost effects which
will be categorized as reputational, sovereignty and arbitration. Other issues such as the effect
of bilateral investment treaties on development will also be deliberated on.
7 BILATERAL INVESTMENT TREATIES ENCOURAGING FOREIGN DIRECT INVESTMENT: ZIMBABWE –SOUTH AFRICA BIPPA AS A CASE STUDY. 1.1 The history behind signing of BIPPA
Zimbabwe was once the “jewel” of Africa because of its vibrant agriculture system, where
farmers would produce enough for the country and surplus for export.1 Agriculture was an
important contributor to the economy of the country, making Zimbabwe one of the strongest
economies in the region over the years. The prominence of the agriculture sector was largely
attributed to foreign investors who had remained and come in the country after the attainment of
the independence by Zimbabwe.2 It was also soon after independence when the government of
Zimbabwe spear headed the land resettlement program to relocate landless families.3The land
reform was not carried out appropriately which resulted in many investors leaving the country
further causing an economic upheaval detriment to the populace.4
A look at some of the policies that were implemented during the land reform offers an
understanding of how domestic policies can affect the operations of foreign investment in a
country. After the constraints of the Lancaster House Agreement in 1990 the government of
Zimbabwe amended the provisions of the constitution concerning property rights. The 1992
Land Acquisition Act gave the government power to acquire land for resettlement. The
government was empowered to identify specific pieces of land in which it had an interest and
then followed by actual acquisition.5
The Act sought to redress the imbalances and injustices
perpetrated on the majority black people of Zimbabwe for over a century. Though the act was
valid and appropriate in addressing the disproportionate allocation of land, it had its own internal
weaknesses. One of the problematic provisions of the Act was section 13 and 14 which ceded
power to the Minister of Land to acquire the land. The Minister as result had wide discretionary
1
Craig J. Richardson , “How the Loss of Property Rights Caused Zimbabwe’s Collapse” No. 4 • November 14,
2005, Cato Institute, Economic Development Bulletin, Project global Economic Liberty
2
SA, Zimbabwe sign investment protection deal, Newzimbabwe.com, 27/11/2009 [accessed 21-03-2010]
3
Ruswa Goodhope, 2004, A study on the impact of governance on land reform in Zimbabwe, A mini-thesis
submitted in partial fulfillment of the requirements for the degree of Master of Economics in the Institute for Social
development. http://etd.uwc.ac.za/usrfiles/modules/etd/docs/etd_gen8Srv25Nme4_5741_1183989258.pdf [acceseed
20-03-2010]
4
It is estimated that, in 2005, the unemployment rate in Zimbabwe was in excess of 80%, and in 2008 the gross
domestic product (GDP) growth rate in Zimbabwe was –12.6%; Central Intelligence Agency. 2009. The World
Factbook 2009: Zimbabwe; available at https://www.cia.gov/library/publications/the-world-factbook/geos/ZI.html;
[accessed 21-04-2010] Zimbabwe beating world economic records (highest inflation rate, smallest domestic market
size, and lowest foreign direct investment). 16 World Economic Forum, International Bank for Reconstruction and
Development/World Bank & African Development Bank. 2009. The Africa Competitiveness Report 2009. Geneva:
World Economic Forum, p 23
5
Land Acquisition Amendment Act 1992
8 BILATERAL INVESTMENT TREATIES ENCOURAGING FOREIGN DIRECT INVESTMENT: ZIMBABWE –SOUTH AFRICA BIPPA AS A CASE STUDY. powers in a manner that transformed the executive arm of the government into the maker,
interpreter and enforcer of the law. This resulted in the suppression of the powers of the judiciary
in contradiction with the internationally recognized doctrine of the separation of powers.
The fast track resettlements program was formally announced by the government in July 2000
which marked a major turning in history of property rights protection in Zimbabwe. The
Zimbabwean Parliament passed two amendments to the Constitution of Zimbabwe: one on 19
April 2000 (Amendment 16), 6and one on 14 September 2005 (Amendment 17)7.President
Mugabe issued a decree amendment to the LAA in 2001 authorizing the forceful removal of
white farmers from their farms, with the government having no obligation to pay for that land
except for compensation on land improvement. It was further stipulated in the amendment, that
the government could resettle people on the farms before waiting for appeals and it was not
possible to appeal on the ground that the compensation was not fair.8
The amendment of Section 16 and 17 of the Zimbabwean Constitution and the subsequent Land
Acquisition Act of 1992 paved the way for the expropriation of white owned rural land thereby
legalizing the expropriation without due process. The government of Zimbabwe failed to take
responsibility of the chaotic land reform as they justified the land reform to the rest of the world
as a mechanism to solve the historical injustices and racial imbalances in the ownership of land.9
There was however no justification because the land reform failed to take cognizance of the real
situation in respect to farm ownership. It completely disregarded the issue of fair and reasonable
compensation for assets taken by the government.10
The correct legal position was that commercial farmers held freehold title and over eighty
percent of farmers were in possession of the certificate of no interest which they had derived
from the Zimbabwean government.11 The certificate of no interest was issued as an indication of
6
Constitution of Zimbabwe Amendment No. 16, Act 5 of 2000
Constitution of Zimbabwe Amendment No. 17, Act 5 of 2005
8
Land Acquisition (Amendment) Act 2002
9
Eddie Cross.Cato Institute • The Cost of Zimbabwe’s Continuing Farm Invasions.1000 Massachusetts Ave., N.W.,
Washington, D.C. 2001 • (202) 842-0200 fax: (202) 842-3490 • www.cato.org, No. 12 • May 18, 2009. [Acessed 1002-2010]
10
ibid
7
9 BILATERAL INVESTMENT TREATIES ENCOURAGING FOREIGN DIRECT INVESTMENT: ZIMBABWE –SOUTH AFRICA BIPPA AS A CASE STUDY. government declining to purchase the farm after being offered to it at a market price.12 As result
farmers who held both the title and the certificates possessed an apparently indisputable legal
right to the land and all the improvements they had made on that land.13 They thus had the right
to be fully compensated when their assets were taken over by the state.
A number of laws were passed to rationalize, authorize and shield the haphazard land reform
process.14 The rule of law was largely undermined during the land reform process as the legal
framework guiding land reform was not reliable, credible and predictable.15 The independence
and partiality of the judiciary and court system was affected by constant political interference.
There was constant manipulation of the courts and judiciary to shield the wrongs of the land
reform.16
Most farmers reduced or gave up production because of this legal uncertainty. This is because
there was lack of assurance that their farming activities were not going to be interfered with. The
process interfered with certain property rights of land owners which play an important role in
agriculture production investment and title deeds which serve as a source of investment capital
by providing a mechanism to access the funds held in the private sector financial institutions.17
This investment is the practical basis for all on-farm capital developments, and the support base
for all the production programs applied on commercial farms.18 The uncertain tenure for new
farmers had a negative effect on production, the lease agreements discouraged new farmers from
substantially investing in agriculture.19
Having found no remedy in the local remedies, a group of Zimbabwean farmers took the matter
to the SADC tribunal in Windhoek, Namibia.20 The proceedings were challenging the
12
Eddie, 2001, supra note 9
Eddie, 2001, supra note 9
14
Eddie, 2001, supra note 9
15
Eddie, 2001, supra note 9
16
When Zimbabwe’s Supreme Court ordered the squatters evicted, Mugabe forced the chief justice to resign and
physically threatened the remaining justices, who relented. Owners abandoned their property, severely disrupting
agricultural production. www.newZimbabwe.com [accessed 05-05-2010]
17
Eddie ,2001,supra note 9
18
Eddie ,2001,supra note 9
19
Foreign direct investment fell to zero by 2001, and the World Bank’s risk premium on investment in Zimbabwe
shot up from 4 percent to 20 percent that year. Supra note 16
20
Mike Campbell (Pvt) Ltd & Others v The Republic of Zimbabwe, SADC (T) Case No. 2/2007
13
10 BILATERAL INVESTMENT TREATIES ENCOURAGING FOREIGN DIRECT INVESTMENT: ZIMBABWE –SOUTH AFRICA BIPPA AS A CASE STUDY. expropriation or potential expropriation without compensation authorized by the property clause
in the Bill of Rights found in Zimbabwe’s Constitution. In 2008, the Tribunal upheld the
farmers’ case. A decision was issued instructing the government of Zimbabwe to protect the
farmers’ legal rights. The government, in spite of being a signatory to the treaty creating the
SADC Legal Tribunal, ignored the ruling.21
In Funnekotter v Zimbabwe, the Hague Tribunal ruled in favor of Dutch investors and was
granted nearly $22million in compensation.22 In this case a group of Dutch origin farmers had
invested in Zimbabwe after 1980 and were protected by the Netherlands –Zimbabwe BIPA23
took their case to the International Court of Justice in Hague.24 Their farms were expropriated
with no compensation. There was direct expropriation of farms by the Zimbabwean regime
violating a number of domestic, regional and international laws. These outright expropriations
resulted not only in violation of domestic and regional but also international law right to property
which provides that:
"Everyone has the right to own property alone as well as in association with others," and
that "no one shall be arbitrarily deprived of his property."25 Article 14 of the African
Charter on Human and Peoples' Rights, however, provides that: "The right to property
shall be guaranteed. It may only be encroached upon in the interest of public need or in
21
In November 2008 this tribunal ruled in favour of Mr Michael Campbell and 78 other Zimbabwean farmers that
the land reform programme was racist and unlawful. In his reaction to this, Pres Robert Mugabe described the ruling
as “nonsense and of no consequence” to Zimbabwe. The tribunal followed up its ruling with a contempt ruling and
costs order in June 2009. On 26 February 2010, the North Gauteng High Court in Pretoria registered these rulings.
They are now rulings of a South African court and as such the cost order is an executable judgment. Four Cape
Town properties in Zonnebloem, Kenilworth and Wynberg were identified. The Sheriff of Cape Town visited these
properties on 11 March 2010 to attach movables. We have received his confirmation about the current state of the
properties: three of the properties are vacant and one is being leased to third party tenants. Since the properties are
therefore of a non-diplomatic nature, they can be attached. A writ of execution of immovable property will therefore
be issued in the North Gauteng High Court today and served early next week. The attachment of immovable
properties in Cape Town will be the first step in what AfriForum describes as its “Civil Sanction Campaign”. This
campaign is our gesture of hope and support to the millions of Zimbabweans waiting in despair for a better life.
http://www.southafrica.co.za/2010/03/26/zim-civil-sanction-campaign Zim – civil sanction campaign , Alana Bailey
March 26, 2010
22
Bernardus Henricus Funnekotter & Others v Republic of Zimbabwe (ICSID Case No ARB/05/6)
23
Agreement on Encouragement and Reciprocal Protection of Investments Between the Republic of Zimbabwe and
the Kingdom of the Netherlands, 11 December 1996
24
Sokwanele, Legal Opinion: Proposed Bilateral Investment Promotion and Protection Agreement between
Zimbabwe and South Africa,26 November 2009, http://www.sokwanele.com/thisiszimbabwe/archives/5253
[accessed 20-03-201]
25
The Universal Declaration of Human Rights, 1948 (article 17)
11 BILATERAL INVESTMENT TREATIES ENCOURAGING FOREIGN DIRECT INVESTMENT: ZIMBABWE –SOUTH AFRICA BIPPA AS A CASE STUDY. the general interest of the community and in accordance with the provisions of
appropriate laws."
It is against this background that the Zimbabwe-South Africa Bilateral Investment Promotion
Agreement(BIPPA) was signed. Given this background there has criticism on the effectiveness
of the current BIPPA in protecting investors in Zimbabwe.26 In actual sense BIPPA was signed
in a contentious environment.27
Negotiations relating to the content of a bilateral agreement between Zimbabwe and South
Africa have been ongoing since 2002. Although theoretically a reciprocal agreement, the BIPPA
was signed largely to make provision for the South African business community's interest in
investment
opportunities
in
Zimbabwe,
particularly
in
the
agro-processing
sector,
telecommunications, mining and infrastructure.28
South African investors, who remain Zimbabwe's largest African trading partner, have in the past
been anxious about investing in Zimbabwe because of the high levels of uncertainty about the
protection of their investments, particularly the protection of property rights. The BIPPA aims to
allay this uncertainty.29
Political risk has been high in Zimbabwe although there are other means of ensuring against this
risk. This research therefore seeks to find out how BIPPA can be used as a weapon to reduce this risk
thereby encouraging investment in Zimbabwe. The risks that the investor can face when investing in
a hostile environment are so many but the following are the one that has been associated with
Zimbabwe. Political risk is the risk that the laws of a country will unexpectedly change to the
investor’s detriment after the investor has invested capital in the country, thereby reducing the
value of the individual’s investment. Sonarajah30 has associated the risks in Zimbabwe with
instability in law and order in the state posing a threat to foreign investment. He interlinked this
risk with nationalistic sentiments.31 The government of Zimbabwe was unable to contain the
26
Sokwanele supra note 24
http://www.theindependent.co.zw/comment/24471-bippa-a-test-of-govts-sincerity.html [accesed 05-02-2010]
28
http://www.mondaq.com/article.asp?articleid=94688 [accessed 05-02-2010]
29
Sokwanele supra note 26
30
Sornarajah M. 2004. The International Law on Foreign Investment (2nd Ed.) Cambridge: Cambridge University
Press , 78
31
ibid 27
12 BILATERAL INVESTMENT TREATIES ENCOURAGING FOREIGN DIRECT INVESTMENT: ZIMBABWE –SOUTH AFRICA BIPPA AS A CASE STUDY. public after triggering an uprising against foreigners. The government, facing opposition,
diverted attention into the scheme for seizing property of white farmers and handing the property
over to the indigenous people. Such situations are usually provided for the terms of international
law through rules that engage the responsibility of the state where it fails to give protection to the
interest of the foreigner from anticipated attacks on property; Nationalistic sentiments pose threat
to foreign investments.
32
Nationalistic sentiments were appeased in Zimbabwe by the existing
politician by carrying out an attack on the white farmers who owned a great share of economy so
as to retain power.33 Of the late the proposed indigenous law has raised eyebrows of potential
investors who were contemplating investing in Zimbabwe.
The investor can however take some comfort, in the recently signed bilateral investment treaties
between Zimbabwe and South Africa. The agreement contains promises by these countries
guaranteeing certain standards of treatment of investors and investments. Political risk may be
substantially reduced because the agreement seek to protect private investment is in place
between the foreign state, the investor’s home state and third parties. The agreement is aimed
specifically at protecting private foreign direct investment in the host sate. BIPPA set forth
standards for treatment of foreign investors in areas such as expropriation of property,
repatriation of funds, and settlement of disputes. When a host state violates the rights guaranteed
to the investor by the treaty, an investor has recourse on an international arbitration.
The problem statement
During Zimbabwe’s controversial land reform program there was wide spread violation of
property rights and the country willfully violated other bilateral investment protection deals
signed with other countries. This resulted in investor confident being lost and a number of
investors left the country. The Zimbabwean economy suffered immensely. In the hope to revive
its economy Zimbabwe signed a bilateral investment treaty with South Africa with a significant
and projected aims of attracting Foreign Direct Investment (FDI) not only from South Africa but
the rest of the world. Critics have however raised doubts over Zimbabwe’s commitment to a
32
ibid ibid 33
13 BILATERAL INVESTMENT TREATIES ENCOURAGING FOREIGN DIRECT INVESTMENT: ZIMBABWE –SOUTH AFRICA BIPPA AS A CASE STUDY. Bilateral Investment Promotion and Protection Agreement (BIPPA) signed with South Africa.34
Although the agreement is bilateral in nature, the spotlight remained on Zimbabwe. Zimbabwe
still cannot be trusted to abide by the agreement due to its history. The problem of commitment
on the side of Zimbabwe which encourages FDI still remains debatable. The SADC judgment
35
against Zimbabwe in which Zimbabwe refused to abide by it still discourages investors and the
question remains on the effectives of BIPPA offering legal protection in Zimbabwe and of which
the proposed Indigenous law has been deemed expropriatory in nature.
1.2 Hypothesis and Research Questions
The hypothesis of this research focus on the study of Bilateral Investment Treaties (BITs)
encouraging FDI flows to the host the host nation although they are many arguments against this
notion on the available literature. My arguments will be that BITs are investment treaties with
clear and enforceable rules which reduce the risks the investor might face and that such reduction
in risk,36 all things being equal encourages investment. It will also further validate that the role of
encouraging FDI has its own negative implications upon the host which can be justified as
disciplinary on the host. This will be achieved through a detailed and comprehensive analysis of
the possible impact of BIPPA on Zimbabwe. This in turn raises four critical questions that will
be used as principal guide to this study:
1- How do Bilateral Investment Treaties (BIT) encourage Foreign Direct Investment(FDI)
2- In what ways can the Zimbabwe- South Africa BIPPA encourage foreign Direct
Investment to Zimbabwe
3- What are the implications of BIPPA encouraging FDI on Zimbabwe
4- What conclusions can be drawn on the role of BIPPA encouraging foreign Direct
Investment to Zimbabwe
34
SA-Zimbabwe bilateral treaty ‘best yet’ but no reason to invest Thursday, February 11, 2010 By Michael Trapido
; http://www.therichmarksentinel.com/rs_headlines.asp?recid=3887 [Accessed 08-03-2010]
35
Sokwanele supra note 24
36
Tobin, Jennifer and Susan Rose-Ackerman, 2003, Foreign Direct Investment and the Business
Environment in Developing Countries: The Impact of Bilateral Investment Treaties, 6 14 BILATERAL INVESTMENT TREATIES ENCOURAGING FOREIGN DIRECT INVESTMENT: ZIMBABWE –SOUTH AFRICA BIPPA AS A CASE STUDY. 1.3 Significance of the study
This study is relevant to the government of Zimbabwe in respect of what changes the
government needs to effect so that the bilateral investment agreement with South Africa can
achieve the desired goal of encouraging foreign direct investment. To the government of South
Africa it helps them to be aware of what possible protection might be expected to their investors
who intent to invest in Zimbabwe. The study will help investors around the world to make an
informed decision if they decide to invest in Zimbabwe and it is great significance to those
developing countries keen to attract foreign direct investment from developed countries using
bilateral investment treaties.
For academics, the study contributes to the ongoing debate on the role of bilateral investment
treaties in encouraging foreign direct investment thereby adding on the existing literature on the
topic. It will also help policy makers on how they can improve on bilateral investment treaties so
that they can encourage foreign direct investment.
1.4 Definition of Concepts
Bilateral Investment Treaties (BITs) – are agreements signed between two countries
concerning the reciprocal promotion and protection and protection of investments.37 The
promotion and protection is reciprocal hence there no indication on the source of investment or
the recipient. The terms often used the host (Zimbabwe) and the home (South Africa). BITs are
agreements that establish the terms and conditions for investment by nationals and companies of
one country in the jurisdiction of another. These treaties provide institutional safeguards for
foreign investment.
Foreign direct investment (FDI)- is a measure of foreign ownership of productive assets, such
as factories, mines and land. Increasing foreign investment can be used as one measure of
growing economic globalization. Foreign Direct Investment is viewed as a major stimulus to
economic growth in developing countries.38
It has a perceived ability to deal with major
37
Geguerios Jose, Luis, Bilateral Investment Treaties on the Reciprocal Protection of Foreign Investment, California
Western International Law Journal, spring 1994, p257
38
http://www.sarpn.org.za/documents/d0000883/P994-African_Social_Observatory_PilotProject_FDI.pdf (accessed
15-02-2010)
15 BILATERAL INVESTMENT TREATIES ENCOURAGING FOREIGN DIRECT INVESTMENT: ZIMBABWE –SOUTH AFRICA BIPPA AS A CASE STUDY. obstacles such shortages of financial resources, technology, and skills.39The IMF defines foreign
direct investment as “investment that is made to acquire a lasting interest in an enterprise
operating in an economy other than that of an investor, the investor’s purpose being to have
effective choice in the management of the enterprise.”
Bilateral Investment Promotion and Protection Agreement (BIPPA ) -Zimbabwe- South Africa
bilateral investment agreement signed by trade ministers from both countries on 27 November
2009 that would protect investments made by nationals of both countries in each other's territory.
1.5 Research Methodology
The main ambit of my paper takes the form of a literature review and analysis; the research
methodology will be qualitative and analytical in nature. Analytical because there are many
scholars who have written on the subject hence it will require an analysis of the available
literature to come up with my on conclusion. Both primary and secondary sources will be
explored and as to the current debate on the topic of BIPPA reference will be made on available
internet sources and newspapers. Bilateral treaties (with special focus on the BIPPA) and official
documents as well as relevant official documents will be explored as primary sources. Relevant
books, scholarly articles and working papers are also examined as secondary sources with the
view to assess the role of Bilateral Investment treaties in encouraging foreign direct investment.
Hence intensive library research and desk-top literature review will be employed.
1.6 Delineations and Limitations of the study
A detailed assessment of the role of bilateral investment treaties in encouraging foreign direct
investment will hardly be achieved in this thesis owing to the time and space limitations. This
study will pay a special focus on Zimbabwe although bilateral investment treaties are reciprocal
as per say, it has been largely acknowledged that their role is mostly to promote foreign direct
invest to the host state. The research will also be limited on the major critical political issues of
the country as it will focus more on issues affecting investment. The work will be limited on the
39
ibid
16 BILATERAL INVESTMENT TREATIES ENCOURAGING FOREIGN DIRECT INVESTMENT: ZIMBABWE –SOUTH AFRICA BIPPA AS A CASE STUDY. situation on the ground since it will be written away from the country. Hence there will be no
interviews thus limiting me to primary, secondary and internet information.
1.7 Literature Review
There has been heated debate among scholars on the effect of bilateral investment treaties on
foreign direct investment. Most of the early studies on the topic have generated inconsistent
results arguing against BIT as a device of investment facilitation, but the most recent refined
research supports the link between signing a BIT and FDI promotion. Pertaining to the recently
signed Zimbabwe- South Africa BIPPA there has also been arguments for and against the
effectiveness of the agreement protecting investments in Zimbabwe, an element which will lure
investors to invest in Zimbabwe.
"We want this BIPPA between our two countries to work. BIPPA is a document signaling to
the world that Zimbabwe is ready for investments and should not be judged by its past
performance and that the country BIPPA signifies a new era," Elton Mangoma, Zimbabwe's
Trade minister, said after the signing ceremony. Mangoma said Zimbabwe was working hard
to improve its investment climate and assured South Africans and other countries that their
businesses will not be affected by the state's controversial empowerment law, which requires
that locals own a 51 percent stake in all foreign firms40
The argument on BIPPA encouraging FDI is based on the underlying statement by the minister.
Despite the land reform issue the indigenous law poses a question on the security of investments
in Zimbabwe. BIPPA is said to stand against the proposed empowerment law.
The first refined study on the proponents of BITs encouraging FDI is by Neumayer and Spess.41
The study disqualifies all the previous studies that argue against BITs as having an impact on
FDI. They focused more on the signaling effect42 of BITs and found a positive effect of BITs on
40
The words of the Minister raise the main question in my research in which views of different scholars will be
employed for clarity. These words can be found in different newspaper article but for reference see; SA -Zim sign a
New Investment Protection Deal- 27/11/2009, newzimbabwe.com [Accessed 02-02-2010]
41
Neumayer, E. and Spess, L.: 2005, Do bilateral investment treaties increase foreign direct investment to
developing countries?, World Development 33(10), 1567–1585
42
Aisbett supports Neumayer and Spess as his study found a positive and strong statistical correlation between BIT
ratification and FDI inflows. His study focuses on FDI flows from 29 OECD countries to 28 developing countries
during 1980-1999. Her finding however does not give a conclusive answer on the effectiveness of BITs as a device
for FDI promotion. Aisbett, E 2007. Bilateral Investment Treaties and Foreign Direct Investmemt: Correlation
versus Causation: CADARE, Working Paper, 1032. Berkerly, Unversity of Carlifonia, http:repositors.
cdliborg/are.ucb/1032.[accessed 20-03-2010]
17 BILATERAL INVESTMENT TREATIES ENCOURAGING FOREIGN DIRECT INVESTMENT: ZIMBABWE –SOUTH AFRICA BIPPA AS A CASE STUDY. FDI inflows across various model specifications. On the role of BITs operating as substitutes to
institutional quality they found limited evidence.
They argue that by concluding BITs with
developed countries, particularly those that are major FDI exporters, developing countries give
up some of their domestic policy autonomy by binding themselves to foreign investment
protection, but could expect to receive more FDI in exchange. Their
conclusion was that the
effect is possibly more evident in countries with weak domestic institutions, especially in
countries for which the confidence and credibility-inspiring signal to foreign investors following
the signing of BITs was most important. 43
Using bilateral outward FDI stock data from 19 OECD and 57 host countries home countries
Egger and Pfaffermayr44 analysis demonstrated that BITs wield positive and significant effect on
the outward FDI of home countries in BIT partner host countries if the treaties are actually
implemented. Buthe and Milner45 examine the proposition on 122 developing countries with a
population of one million people from 1970 to-2000. In their research they use a range of control
variables relating to market size, economic development, trade openness, domestic and political
constraints and political instability. They put forward the argument that the greater number of
BITs a developing country concludes the more appealing it will be to foreign investors which in
turn increases inward FDI. They however caution that developed countries have to weigh the
benefits of increased FDI and the costs.
Salacuse and Sullivan46 find that BITS with the strongest investor protection attracts FDI as
compared to an agreement with weaker standards. In line of this argument their results showed
that United States BIT is more likely to induce FDI inflows than those by OECD countries. They
also argue that ratified BITs are more effective in investment promotion compared to those that
are not. 47
43
Neumayer and Spess supra note 42
Egger P and Paffermaryr, M. 2004. The Impact of Bilateral Treaties on Foreign Direct Investment, Journal of
Comparative Economics, Elsevier Vol 32(4) 788-804
45
Buthe, Tim & Helen V. Milner. 2005. \The Politics of Foreign Direct Investment into Developing Countries:
Increasing FDI through Policy Commitment via Trade Agreements and Investment Treaties?" Working Paper.
46
Salacuse, J. and Sullivan, N.: 2004, Do BITs really work? An Evaluation of bilateral investment treaties and their
grand bargain, Harvard International Law Journal 46(1)
47
Gallagher and Birch examines the impact of the total number of BITs and BITs with the United States on the total
and bilateral inflows of FDI into 2003. They concluded that the total number of signed BITs has an independent and
44
18 BILATERAL INVESTMENT TREATIES ENCOURAGING FOREIGN DIRECT INVESTMENT: ZIMBABWE –SOUTH AFRICA BIPPA AS A CASE STUDY. Grosse and Trevino48 in their study on the effect of BITs on FDI in 13 countries of Central and
Eastern Europe covering the period from 1990 to 1999- argue that BITs help to curb the
uncertainty and costs associated with long-term capital investment, thereby resulting in inward
FDI. They propound that BIT reduces the cost of doing business as investors gets the assurance
that foreign and domestic investors will be treated on the same footing. Egger and Merlos49 they
find that Bits had a better impact on long-term basis than in the short term. The 2008 authors
Busse,50 et al whose study focus on the 1978 to-2004 assert that:
“BITs promote FDI inflows to developing countries. This result is fairly robust across
various models. Moreover, the significantly positive effect of BITs on bilateral FDI Flows
holds for FDI flows from developed source countries to various sub-samples of
developing host countries. BIT may even substitute for weak local institutions, though not
unilateral FDI-related liberalization measures. All this suggest that policy makers in
developing countries have resorted to an effective means to promote FDI by concluding
BITs”
In contrast to Neumayer and Spess,51and proponents of the theory that BITs encourages FDI to
developed Yackee52 in his paper concludes that the institutional quality test shows an opposite
conditional relationship than that found by Neumayer and Spess. He argues that against the
strong relationship between BITs and FDI on the pretext that: potential investors are not aware of
the existence of BITs and that BITs do not solve the problems of credible commitment.
positive effect on total FDI inflow into a host country. They however not associate this effect on the United States
BITs. Gallagher, KP and Birch, MB (2006), DO Investment Agreements Attract Investments? Evidence from Latin
America, The Journal for World of Investment Trade, Vol; 7 No 6, 961-974.
48
Grosse R and Trevino, T L J.2005,. New Institutional Economies and FDI Location in Central and Eastern
Europe, Manage International Review Volume 45 No 2: 123-145.
49
Egger, P. Merlo (2007),. The Impact of Bilateral Investment Treaties on FDI dynamic; The world Economy 2007.
Vol 30: 1536-1549.
50
Busse,M. Koeniger, J and Nunnenkemp, P 2008, FDI Promotion through Bilateral Investment Treaties: More than
an BIT ? Kiel Working Paper NO.1403 February keil: Keil Institute for the World Economy.
51
Neumayer and Spess supra note 42
52
Yackee, J. W 2007. 2007. Do BITs Really Work? Revisiting the Emperical link between investment treaties and
FDI, Legal Research Paper Series, Paper No. 1054 Wirsconsin: University of Wisconsin Law School
19 BILATERAL INVESTMENT TREATIES ENCOURAGING FOREIGN DIRECT INVESTMENT: ZIMBABWE –SOUTH AFRICA BIPPA AS A CASE STUDY. Hallward-Driemeier53 , as one of the exponents argues that BITs are complements to good
institutional quality and therefore do not perform their original function, namely to provide
guarantees to foreign investors in the absence of good domestic institutional quality. Looking at
the bilateral flow of FDI from 20 OECD countries to 31 developing countries over the period
1980–2000 he concludes that BIT between two countries does not increase the flow of FDI from
the developed to the developing signatory country. Study by Tobin and Rose-Ackerman 54 finds
a negative effect at high levels of risk and a positive effect only at low levels of risk, with the
majority of developing countries falling into the high risk category. Sornarajah55, for example,
suggests that ‘‘in reality attracting foreign investment depends more on the political and
economic climate for its existence rather than on the creation of a legal structure for its
protection. The Zimbabwe –South Africa Bilateral investment agreement will be tested in line of
the above argument to see in which scholarly view holds water.
1.8 Preliminary Chapter overview
Chapter one is the introduction. It outlines the background of the research problem, definitions of
concepts, research questions, hypotheses, the significance and the research methodology.
The Second chapter constitutes the general background on BIPPA by highlighting the role of
bilateral investment treaties in encouraging foreign direct investment. It will highlight the
history of bilateral investment treaties in line with role encouragement of foreign direct
investment. It will also be shown how the basic structure and the ultimate goal of the treaties in
support investment protection which investors seek. The history, the aim and structure of BITs
shows how the main aim has been to ensure security of investments in the host nation.
53
Hallward-Driemeier, M (2003). Do Bilateral Investment Treaties Attract FDI? Only a bit…and they could bite.
World Bank Policy Research Paper WPS 3121, World Bank: Washington DC
54
Tobin, J. and Rose-Ackerman, S.: 2004, Foreign direct investment and the business environment in developing
countries: The impact of bilateral investment treaties. Yale Law School Center for Law, Economics and Public
Policy Research Paper No. 293
55
Sornarajah. M. (1986), State Responsibility and Bilateral Investment Treaties’ Journal of World Trade Law, 20,
79-98
20 BILATERAL INVESTMENT TREATIES ENCOURAGING FOREIGN DIRECT INVESTMENT: ZIMBABWE –SOUTH AFRICA BIPPA AS A CASE STUDY. The third chapter will carry out an analysis of the BIPPA provisions and how it aims to achieve
its ultimate goal. It depicts how clear outlined rules are aimed at protecting investments in a risk
country like Zimbabwe. Like all the other BITs BIPPA have substantive and procedural rules at
the disposal of the investor for investment protection. The fourth chapter then dwells on the
negative and implications of the provisions of BIPPA upon the host. Last chapter 5 will then
draw conclusions from the arguments raised in chapter 2, 3, and 4 in favor and against BIPPA
encouraging foreign direct investment. Recommendations will also be given in this chapter.
21 BILATERAL INVESTMENT TREATIES ENCOURAGING FOREIGN DIRECT INVESTMENT: ZIMBABWE –SOUTH AFRICA BIPPA AS A CASE STUDY. CHAPTER TWO
Introduction
In order to have a clear understanding of the perceived role of Bilateral Investment Treaties one
needs to have an understanding of the background behind the treaties. Hence this chapter
explores the origins, the contents and the objectives of BITs. The chapter will then proceed by
examining the relationship between BITs and FDI from a theoretical perspective and elaborates
on the causal mechanisms that may link these two phenomena. This chapter offers a background
to the role of investment treaties and how they come about. It offers a background to the
understanding why BIPPA was signed with the aim of encouraging FDI. The history, the aims
and the structure of BIT shows how Zimbabwe signing BIPPA at point when there is no certainty
on the investment area is in line with the ultimate goal of these investment treaties.
The point that needs to noted that as this chapter folds is that from history these treaties has
always been signed to ensure security of investors in a foreign nation especially where the risk of
expropriation was high. The nationalization of the British oil assets by the Iran in 1951, the
expropriation of Liamco’s concessions in Libya in the 1955 and the nationalization of the Suez
by Egypt a year later show how investment can be prone to sovereign risk in the host country.
56
South Africa also soon after apartheid signed a number of investment treaties to ensure and
encourage investors by signaling to the world that an investor friendly environment was
emanating.57 After the colonial era developed countries with fear of the emerging governments
the only way to encourage national to foreign investment was to ensure that there is an
international instrument to protect these investors. The Legal system is said to been developed
out of necessity to cope with the emergency situations. The only way to restore a climate of
favorable international which had been endangered by extensive expropriation policies was the
developed and international instruments which sates had to commit to. Bilateral investment
treaties became the main source of international investment law.58George Schultz points out that
bilateral investment treaty were not only aimed at protecting investments but to reinforce
56
Jesawald W. Salacuse supra
Luke peterson
58
United Nations Conference on Trade and Development (UNCTAD) Bilateral investment treaties , trends in
Investment Rule Making, United Nations , New York Geneva 2007, p.1
57
22 BILATERAL INVESTMENT TREATIES ENCOURAGING FOREIGN DIRECT INVESTMENT: ZIMBABWE –SOUTH AFRICA BIPPA AS A CASE STUDY. traditional international principles and practices regarding foreign direct private investment.59
The need to attract FDI for the development of the state has been apparent in many capital
importing states by not wanting to perceive internationally posing a frequent arbitrary threat of
expropriation both in BIT generation as in the FCN generation.
THE HISTORY BEHIND BILATERAL INVESTMENT TREATIES
During the colonial era military power was sufficient to safeguard investments and trade being
gun-boat diplomacy. In some parts investors had to rely upon their governments taking up the
claim on their behalf through diplomatic measures. 60 The right of diplomatic protection was and
still is inadequate to promote foreign investment; the Latin American countries relied upon the
Calvo Doctrine, which denied the possibility of interference under diplomatic protection
principle.61 The hurdle for investors to convince their government to claim diplomatic protection
for its nationals was very high and unpredictable. There was basically no international law to
meet the needs of foreign investment and this was also noticed in the International Court of
Justice in the Barcelona Traction case.62
The only protection for foreign investors was the customary international legal rule of minimum
standard of treatment and the so-called Hull rule. The Hull Rule came into being as result of USMexico dispute in which the New Mexican government after the revolution expropriated
different American holdings in Mexico.63 According to this rule countries that expropriated
property were required to provide prompt, adequate and effective payment. The Hull Rule dealt
exclusively with cases of expropriation and therefore provided no general protection against
59
George P. Schultz, Transmission letter to the President recommending transmission of the US-Turkey BIT, 1985 .
http:// ankra. Euembassy. gov/IRC/treaty/1985.htm [accessed 17-03-2010]
60
Tobin, Jennifer. "Separate and Unequal: Bilateral Investment Treaties and Property Rights in Developing
Countries" Paper presented at the annual meeting of the Midwest Political Science Association, Palmer House
Hotel, Chicago, IL, Apr 12, 2007 . 2010-01-24, http://www.allacademic.com/meta/p197323_index.html,. Republic
of South Africa,. Bilateral Investment Treaty Policy Framework Review: Government Position Paper, 7.
http://www.pmg.org.za/files/docs/090626trade-bi-lateralpolicy.pdf.
61
John Dugard, International Law, A South African Perspective, 3rd Ed., 2005, p 295;
62
Sonarajah M; The International Law on Foreign Investment, second Edition, Cambridge University Press, 2004, p
213.
63
In one of a series of diplomatic notes to the Mexican Minister of Foreign Affairs, the US Secretary of State
Cordell Hull stated that ‘‘no government is entitled to expropriate private property, for whatever purpose, without
provision for prompt, adequate, and effective payment therefore.’’ Guzman, Andrew. 1998. Explaining the
Popularity of Bilateral Investment Treaties: Why Ldcs Sign Treaties That Hurt Them. Virginia Journal of
International Law 38: 639.641
23 BILATERAL INVESTMENT TREATIES ENCOURAGING FOREIGN DIRECT INVESTMENT: ZIMBABWE –SOUTH AFRICA BIPPA AS A CASE STUDY. discriminatory treatment. This requirement was more inclined to the needs of developed
countries that exported capital. The Hull Rule however ceased to be the rule of customary
international law in the mid-1970s because developing countries challenged its validity as part of
their demands for the New International Economic Order with some success.
BITs can however be deemed as the successor to the friendship commerce and Navigation
treaties (FCN).64 The USA negotiated and signed FCNs with many European States including
France, Italy and Latin American States so as to improve and to protect many foreign trade
relationships with each other.65These treaties provided international legal standard for the
protection of natural and legal persons.66 Nevertheless FCN clause failed to cater for the problem
of creeping expropriation and also suffered from poorly drafted arbitration clauses. Historically
the FCNs have covered a broad range of topics, on the contrary to the European Union BITs
which was limited towards promotion and protection of investors.67 Though the FCN was
intended to facilitate trade and shipping they usually contained provisions affecting the ability of
one’s country nationals to own property or to do business in the territory of the other. The
continued uncertainties arising from the FCN regarding the safety of foreign investors coupled
with other potentially positive benefits prompted the ushering in of the BIT.
A new era in the historical development of the recent international legal framework emerged in
the late 1950s, as individual European countries negotiated bilateral treaties. This was because in
the late 1950s fears heightened of the security of foreign investments when concerns about
decolonization in the developing world and the spread of communism emanated.68 Germany,
which had lost all of its foreign investments as result of its defeat in World War II, took the lead
in this new phase of bilateral making.69 The first agreement thus was between Germany and
64
Sonarajah M supra note at 30, 217.
Vandevelde J Kenneth, The BIT Program: A Fifteen-Year Appraisal, The Development and Expansion of
Bilateral Investment Treaties, American Society of International Law Proceedings, 1992, 533.
66
Sonarajah,supra note 30, 209
67
Mark S Bergman,. Bilateral Investment Protection Treaties; An Examination of the Evolution and Significance of
US Prototype Treaty, Journal of International Law and Politics, Vol 16,1983, 6.
68
Treaty for the promotion and Protection of Investments , Pakistan-F.R.G, 457 UNTS. 23, Lauterpacht ELIHU,
international Law and Private Foreign Investment, Indiana Jornal Global Legal Studies, Spring 1997, p 266
69
Salacuse, J. and Sullivan, N.: 2004, Do BITs really work? An evaluation of bilateral investment treaties and their
grand bargain, Harvard International Law Journal 46(1) :68.
65
24 BILATERAL INVESTMENT TREATIES ENCOURAGING FOREIGN DIRECT INVESTMENT: ZIMBABWE –SOUTH AFRICA BIPPA AS A CASE STUDY. Pakistan in 1959.70 A number of bilateral investment protection agreements (BIPAs)71 when then
concluded as compared to the United States.72 A total of Eighty-three BITs were concluded by
1970, jus eleven years after Germany and Pakistan conclude the First BIT. In 1980, BITs spread
to the Eastern and Central Europe, Asia, Africa and South America as they opened their markets
in pursuit of foreign capital.
One of the reasons that might have resulted in the progress of European programs compared to
the United States was that they were less strict in their demands as regards to guarantees
pertaining matters such as free conversion of local currency, abolition of performance
requirements and protection against expropriation.73 On the side of developing countries one of
the factors that prompted the increase BITs was lead by the economies of oil-exporting
developing countries. Since 1979, they had undergone balance of payments deficits on current
accounts due to rising import prices and a failing demand in the prices of their exports.74 As a
result they had to come terms with liberalization of their foreign investment codes and the
conclusion of BITs a measure to attract FDI.
In model BITs various economic, political and historical factors shaped and continue to shape
the development of international law on foreign investments.
75
The modern BITs retain but
expand upon the FCN treaty establishment concepts and terminology in areas of entry and
general treatment standards, property protection and financial transfers. 76In limiting the scope to
exclusively investment related issues the European model was incorporated. In the absence of a
clear multilateral regime, bilateral investment treaties remain the main international means for
foreign investment regulation.77
70
Jeswald W. Salacuse, supra note 69, 102
BIPA referred to non-United States investment protection agreements where as BIT refers only to the United
States bilateral investment treaty. ibid
72
Switzerland, France, the United Kingdom, the Netherlands and Belgium followed relatively after Germany in
their order, by 1977; European countries had concluded approximately 130 BITs with developing countries.above
73
Do Bit Really Work? An Evaluation of Bit Treaties and their Grand Bargain, Volume 46
74
UNCTAD 1988 PG 1
75
Tobin, Jennifer and Rose Ackerman supra note 69
76
ibid
77
ibid
71
25 BILATERAL INVESTMENT TREATIES ENCOURAGING FOREIGN DIRECT INVESTMENT: ZIMBABWE –SOUTH AFRICA BIPPA AS A CASE STUDY. THE AIMS OF BILATERAL INVESTMENT TREATIES
The agreements have three primary objectives, the promotion and protection of investments, the
minimization of risk and loss in the event of an expropriation and the submission of investment
disputes.78 A BIT between a developed and a developing country is found on the grand bargain:
a promise of the protection of capital in return for the prospect of more capital in return for the
prospect of more capital in the future.79 Author Kenneth Vandevelde propounds that the primary
objective of the BITs is to promote the application of the rule of law to foreign investment, while
a secondary purpose is to create a liberal investment regime.80 The aim of a Foreign Direct
Investment, according to the definition of International Monetary Fund (IMF), is to acquire a
lasting interest in an enterprise operating in an economy other than that of the investor, the
investor’s purpose being to have an effective voice in the management of the enterprise.81
The main goal behind the signing of BITs rests on the need of developed countries wanting their
nationals to invest safely and securely in developing countries and as well as the ensuing need to
create a stable international legal framework to facilitate and protect investments.82 In the
absence of the BITs foreign investors are obliged to rely on the host law alone which made
investors open to a number of risks. Bilateral investment treaties are thus the dominant means
through which investment in low-income and middle income countries is regulated under
international law by ensuring investment neutrality to foreign investment83. The provisions of
BITs are meant to secure the legal environment for foreign investors, establish mechanisms for
dispute resolution and facilitate the entry and exist of funds.
78
Mark S, Bersman, Bilateral Investment Protection Treaties: An Examination of the Evolution of Significance of
the US Prototype Treaty. Journal of International Law and Politics, Vol 16
79
Salacuse and Sullivan,2005, supra note 46, 77
80
Vandevelde, 2004, supra, 98.
81
OECD BENCHMARK DEFINATION ON FOREGN DIRECT INVESTMENT, Third Edition
http://www.oecd.org/dataoecd/10/16/2090148.pdf , 7
82
Reisman .Michael W: Indirect Expropriation and its Evaluation in the BIT generation, The British International
Law 2003, Vol. 74 (2003) p115-150 and see also Geguerios Jose, Luis, Bilateral Investment Treaties on the
Reciprocal Protection of Foreign Investment, California Western International Law Journal, spring 1994, p257.
83
Vandevelde J. Kenneth , Investment Liberalisation and Economic Development: The role of Bilateral investment
Treaties. Columbia Journal of Transnational Law , 1998, p.507-514
26 BILATERAL INVESTMENT TREATIES ENCOURAGING FOREIGN DIRECT INVESTMENT: ZIMBABWE –SOUTH AFRICA BIPPA AS A CASE STUDY. Bilateral investment treaties are viewed by host governments and by investors as devices that
raise the expected return on investments.84 They are more inclined to assist FDI inflows of the
host country as a part of broad FDI policy.85 Besides assisting developing countries to attract
scarce capital to finance liquidity constraints, the treaties also help giving signals to the
multinational companies that the government are now committed in providing investments
protection and guarantees.86 BITs thus have positive spill-over effects as the encouragement of
FDI flows need not be limited to the parties to the treaty but to the rest of the world.87
The role for BITs in creating new flows in contributing to the new stream of investment is
indirect since treaties do not create economic conditions for investments but rather they are
intended to remove legal obstacles to free flow of investment.88 BITs thus provide investment
security and neutrality.89 BITs aim to obtain legal protection for investment as a means of
fostering economic growth and development.90
FEATURES OF BILATERAL INVESTMENT TREATIES
Although many countries rely on their model agreements when negotiating individual BITs,
BITs are remarkably similar in their organization and content.91 BITs addresses four substantive
84
Guzman, Andrew. 1998. Explaining the Popularity of Bilateral Investment Treaties: Why Ldcs Sign Treaties That
Hurt Them. Virginia Journal of International Law 38: 639.
85
Secretary of state George Schultz argued the BITS were designed ,“ to protect investment not only by the treaty
but by also reinforcing traditional international principles and practices regarding foreign private investment, George
P. Schultz, Transmission Letter to the President recommending transmission of US-Turkey BIT, 1985.
http://ankra:uembassy.gov/IRC/treaty/1985.htm [accessed 22-03-2010]
86
http://www.unctad.org/TEMPLATES/webflyer.asp?docid=2995&intItemID=2023&lang=1 (accessed 07-02-2010)
87
Neumayer, Eric and Laura and Laura Spess, 2004, Do Bilateral Investment Treaties Increase Foreign Direct
Investment? Investrment Treaties. Briefing 2 August 2007 , International Institute for Environment and
Development
88
Lorenzo Cotulo, Investrment Treaties. Briefing 2 August 2007 , International Institute for Environment and
Development
89
Vandevelde J. Kenneth, Investment Liberalisation and Economic Development: The role of Bilateral Investment
Treaties, Colombia Journal of Transnational Law, 1998, p .507-514
90
Dolzer Rudolf and Stevens Margrete, Bilateral Investment Treaties, Martinus Nijhoff Publishers, 1995,12.
91
Several factors account for the uniformity among BITs; most BITS between developed and developing states have
been negotiated on the basis of models drafted by developed states. The models themselves are similar because the
drafters often drew upon certain common sources such as the Organization of Economic Cooperation and
Development (OECD) Draft Convention on the Protection of Foreign Property. See Kenneth J.Vandevelde, United
States Investment Treaties; Policy and Practice 29, 1992 While BITs are modified according to the signatories’
preferences, in most cases, they cover substantially similar issues and have changed little with time , see HallwardDriemeier, 2003; Tobin & Rose-Ackerman, 2005; UNCTAD, 2000.
27 BILATERAL INVESTMENT TREATIES ENCOURAGING FOREIGN DIRECT INVESTMENT: ZIMBABWE –SOUTH AFRICA BIPPA AS A CASE STUDY. issues: conditions for the admission of foreign investors to the host state, standards of treatment
of foreign investors, expropriation and methods of for resolving investment disputes.92
Most BITs have similar provisions and the following issues can be found in most BITs:
Preamble, investment and investor definitions, treatment of investment, expropriation, currency
transfer, subrogation and dispute settlement provisions.93 A number of BITs also include
provisions allowing for transfer of monies and for some protection from war and civil
disturbance.94 Nonetheless a limited number contain provisions on the movement of key
employees, and prohibiting certain forms of performance requirements.95 Generally, treaty
provisions will only apply to investments once they have been established in the host state.
However, some treaties particularly those concluded by the U.S., Canada and Japan may widen
protections to the pre-establishment phase meaning prior to the establishment of the investment
in the host state’s territory.96 In terms of the sectors of the economy that are covered by the
substantive disciplines, it is common for treaties to cover all sectors, with the exception of those
which are expressly excluded of the treaty, or free from the application of certain of its
provisions.97
The promotion and protection of investment is reciprocal hence most BITs do not explain which
party is the source of investment or which is the recipient.98 They are however of made between
unbalanced partners.99 They are usually concluded between a capital exporting developed state
and a developing state keen to attract capital from that state. Hence in practical sense taking into
consideration the differences in wealth and technology, it is usually one flow of investment that
92
Goerge M. von Mehren., Navigation Through Investor-State Abitrations: An overview of Bilateral investment
Treaties Claims DISP. RESOL.J., 2004, 69-70.
93
Sonararaj M.supra note 30, 2004, 217.
94
UNCTAD., Bilateral Investment Treaties in the Mid-1990s, United Nations, New York and Geneva 1998, 73-80.
95
UNCTAD, BITs in the Mid-1990s, pp. 81–3; Provisions covering performance requirements are found in some
U.S., Canadian and Japanese treaties.
96
UNCTAD, Admission and Establishment, 1999, 26–8;
97
Luke Eric Peterson ,Bilateral Investment Treaties and Development Policy-Making, International Institute for
Sustainable Development November 2004 © 2004 International Institute for Sustainable Development and the Swiss
Agency for Development and Cooperation, http://www.investmenttreatynews.org/content/archives.aspx
98
Siquerios Jose Luis, Bilateral Treaties on the Reciprocal Protection of Foreign Investment, Califonia Western
International Law Journal, Spring 1994, 257.
99
Sonarajah,. 2004, supra note 30,207.
28 BILATERAL INVESTMENT TREATIES ENCOURAGING FOREIGN DIRECT INVESTMENT: ZIMBABWE –SOUTH AFRICA BIPPA AS A CASE STUDY. is reflected.100 Bilateral investment treaties are voluntary there is no element of oppression
involved in their conclusion as the signing is reached through negotiations.
THE INTERLINK BETWEEN BITS AND FDI
There are four areas of BITS and FDI intersection that have been determined and this has been
collaborated by econometric literature. It has been submitted by a number of scholars that BITs
has the following impact on FDI:

Commitment effect:101 research testing this hypothesis take bilateral FDI flows between
pairs of developing host countries and developed home countries as a dependent variable,
and examine whether and when the conclusion of BITs (mostly its signing) contributed
to increased FDI flows from home BIT partner countries to the host partner countries.
The argument is based on the pretext that binding international commitment to
satisfactory protection and treatment of foreign investors will reduce risks and increase
FDI from home partner countries.
Developing countries in their bid to attract FDI often suffer from “holdup” or “dynamic
inconsistency’’ problem in which cure is found in the basic provisions of BITs.102 The dynamic
inconsistency problem emanates from the fact that the host countries often find it difficult to
protect investments once the investment is established and investors have dejected significant
costs.103 Besides promise of fair and equitable treatment previously the host will exploit or
expropriate the assets of the investors hence BITs acts as a shield against expropriation or an
arbitrary treatment of investments.104 National legislation is often not sufficient to provide
adequate security to foreign investors and with no international enforcement the cost of doing
business will be high that most investors decide not to invest. Bits are designed to erase these
barriers and guarantee legal rights to investors.
100
Sonarajah, supra note 30,2004, 207.
UNCTAD Series on International Investment Policies for Development,.The Role of International Investment
Agreements in Attracting Foreign Direct Investment to Developing Countries, 2009, 29-30.
102
Andrew T Guzman,. Why LCD Sign Treaties that hurt them, Virginia Journal of International Law Vol 38 639.
658
103
ibid
104
ibid
101
29 BILATERAL INVESTMENT TREATIES ENCOURAGING FOREIGN DIRECT INVESTMENT: ZIMBABWE –SOUTH AFRICA BIPPA AS A CASE STUDY. Bilateral Investment Treaties offer a binding international commitment by guaranteeing a fair
protection and treatment of foreign investors, reducing risk which in turn increases FDI.105 They
impose the requirements for fair compensation to be paid and they specify an independent
international forum in which compensation is to be determined. Transparency, predictability and
legal security needed by foreign investors is provided by BITs.106 They also protect foreign
investors against political and other risks highly prevalent in many developing countries.107 Far
from being neutral, foreign investors are often granted higher security and better treatment than
domestic investors. By giving private parties a right to pursue and receive a legal remedy, BITs
boost the credibility of the host government’s commitment. As a result, we would expect some
violations to be deterred by a BITs commitment and expected returns to investments to increase
accordingly.
Government non-compliance has costs to the government.108 BITs do this by clarifying
commitment, explicitly involving the home country’s government, enhancing enforcement.109
BITs are much more precise than customary law thereby reducing the ambiguity of the host
government obligations. They provide broader legal framework in which to interpret specific
contractual obligations. Precision removes potential avenues for government deniability, making
it clearer to the broader range of audiences domestic and foreign that an obligation has been
disregarded.
BITs in force provide a useful commitment mechanism because states that renege on a BIT or
any other international obligation for that matter violate the general principle of international law
that agreements should be respected (pacta sunt servanda)110. Thus home country has obligation
p of good faith treaty observance. States that violate a BIT offend not only private investors but
also their government. Such violation is likely to have negative reputational repercussions which
can in turn damage foreign policy interests that go above and beyond the specific investment
105
Guzman, 1998 supra note 102, 28
ibid
107
ibid
108
Several recent examples illustrate the potential price tags involved in investment arbitration. In three complaints
against Argentina, ICSID awarded the American companies, LG&E, Enron, and Sempra, 60 , 100 , and 130 million
dollars, respectively.
109
Guzman, 1998 supra note 84
110
John Dougard, 406, this principle is reaffirmed by art 26 of the Vienna Convention on the Law of Treaties.
106
30 BILATERAL INVESTMENT TREATIES ENCOURAGING FOREIGN DIRECT INVESTMENT: ZIMBABWE –SOUTH AFRICA BIPPA AS A CASE STUDY. decision.111State to state legal arrangements implicate the interests of home governments much
more directly than simple contracts between private parties.
They may impose discipline on governments that would otherwise favor narrow interests or
demand corrupt payoffs. They bind a country to uphold contracts with international direct
investor. Thus, BITs may bring greater FDI flows, especially to riskier countries. On other hand
developing countries may be faced with standard form treaties drafted by wealthy countries that
limit a nation’s domestic policy flexibility and lead it to favor outside investors or narrow local
interests over the general population.

BITs with stringent provisions in favor of foreign investors have a greater chance to
stimulate FDI.112 The research center of attention has based on the comparison of inflows
from home countries having concluded inflexible BITs with inflows from countries with
relaxed BITs. Even if some countries failed to realize the full implications of the
agreements they signed, the treaties serve to increase investment protection, and as such
should increase foreign direct investment. There have however been different results on
this matter even though there has been some finding in favor of this hypothesis. The
arguments in favor are usually attributed to BITs signaling properties rather than to direct
legal protections they afford to investors.
BITs allow governments to credibility commit themselves to protect investor’s property.
Investors are allured by the existence of a strong, well enforced property rights
environment.113 “Economic historians from Adam Smith to Douglass North have theorized
that market economies depend on property rights help to ensure the efficient exchange of
goods between actors.” Well enforced property rights systems ensure investors that they will
directly realize any benefits from the use of their property, making investors more likely to
111
Abbott and Snidal 2000: 426; Elkins, Guzman, and Simmons 2006: 823; Guzman 2005; Lipson 1991; Simmons
2000; Vandevelde 2000: 488.
112
UNCTAD (UN Conference on Trade and Development), Recent Developments in International Investment
Agreements (2008_June 2009), report. New York & Geneva, 29-30
113
Hallward-Driemeier, M.: 2003, Do bilateral investment treaties attract FDI? Only a bit and they could bite.
World Bank Policy Research Paper WPS 3121
31 BILATERAL INVESTMENT TREATIES ENCOURAGING FOREIGN DIRECT INVESTMENT: ZIMBABWE –SOUTH AFRICA BIPPA AS A CASE STUDY. invest, but to invest wisely and efficiently.114 Thus government can claim a portion of foreign
direct investment by ensuring strong system of well enforced property rights by the
conclusion of bilateral investment treaties.

Shortcut to improved institutional quality:115 This theory is approved by using both
aggregate and bilateral flows of FDI. The quality of institutions and policies that are
required by investors usually takes time to be achieved. BITs may be viewed by foreign
investors as a substitute to improved institutional quality and thereby encourage FDI
inflows these investors.
Unlike developed counties with well established institutions, many of developing countries are
characterized by uncertain political environments. Under such conditions, multinational
corporations (MNCs) and home governments of capital exporting countries, typically developed
countries, have sought protection for their investments. One mechanism to obtain this protection
is by the signing of Bilateral Investment Treaties (BITs). BITs are agreements that establish the
terms and conditions for investment by nationals and companies of one country in the
jurisdiction of another. These treaties provide institutional safeguards for foreign investments.
Developing countries can also expect some benefits from signing BITs.
A country with higher number of bilateral investment treaties suggests that investors are not
confident about the host destination.116 The argument is BIT operates as an alternative to a host
country that has weak domestic rules.117 They give host government competitive edge in
attracting capital if there are otherwise doubts about their willingness fairly to enforce
contracts.118
114
Abbot, supra ,2000, 26.
UNCTAD, supra note 112,2009, 29-30.
116
Elkins, Zachary, Guzman, Andrew T, & Simmons, Beth (2006), Competing for Capital: The Diffusion of
Bilateral Investment Treaties, 1960-2000. UC Berkeley: Berkeley Program in Law and Economics, Retrieved from:
http://escholarship.org/uc/item/0bp87871
117
Ibid
118
Neumayer and Spess supra note, 42, 29
115
32 BILATERAL INVESTMENT TREATIES ENCOURAGING FOREIGN DIRECT INVESTMENT: ZIMBABWE –SOUTH AFRICA BIPPA AS A CASE STUDY. 
Signaling effect:119 This proposition is usually valued using total FDI inflows into host
developing countries and the number of concluded BITs. This has been done in most
cases with OECD countries, and at times also with developing countries, as a key
explanatory variable. Host countries hope that the treaties signal to foreign investors
either a strong protective investment environment or a commitment that foreign
investments will be protected through international enforcement of the treaty. Thus BIT
is expected to kindle FDI from all countries, not only from the BIT contracting parties.
One significant impediment to FDI inflows to the developing world involves the high level of
risk associated with such investment and poor property rights laws. Historically, many
developing countries had expropriated foreign assets without adequately compensating the
owners of the assets. Therefore, developing countries that desire to attract more capital need to
convince foreign investors that they can be trusted. By signing BITs developed countries sends
out a signal that they are now in favor of FDI thereby separating themselves to those that are not.
Signing a BIT may involve substantial negotiation efforts. The negotiation phase may involve
several negotiation rounds, side payments, and diplomatic skills.120 In addition, signing a BIT
may demonstrate the seriousness of the host government to improve their treatment of foreign
investors.121 This is especially true if the government faces domestic opposition to the treaty.122
By agreeing to sign a treaty which requires domestic support for its ratification rather than an
executive agreement, governments indicate that they intend to live up to the terms of the
agreement.123
119
UNCTAD, 2009 supra note 112, 29-30.
UNCTAD. (1998). Bilateral Investment treaties in the mid 1990s. New York and Geneva: United Nations
121
Ginsburg Tom, International Substitutes for Domestic Institutions: Bilateral Investment Treaty and
Governance,Internationla Review of law and Economics, 25:117.
122
kerner, a. (2007). Why should i believe you?: the sources of credibility in bilateral investment treaties and their
effects. . 48th international studies association annual conference. Chicago: 48th international studies association
annual conference, 37
123
Martin, l. (2005). The president and international commitments: treaties as signaling devices. presidential studies
quarterly 35 , 440-465.
120
33 BILATERAL INVESTMENT TREATIES ENCOURAGING FOREIGN DIRECT INVESTMENT: ZIMBABWE –SOUTH AFRICA BIPPA AS A CASE STUDY. Finally, signing a BIT may be an indication of more comprehensive economic liberalization
efforts on the part of the host country. As such, it can serve as a signal of a more welcoming and
profitable economic climate to foreign investors.124While the implementation and enforcement of
a BIT involves ex-ante costs as well revision of domestic laws, for example most of these costs
are higher in the signing and ratification stage. As an UNCTAD study argues, “Once a BIT
signed, or expected to be signed, the market has absorbed or begins to absorb it.”125
A signed BIT that is not in force generates only limited obligations to the host government,
however. Under the Vienna Convention on the Law of Treaties, states are obliged not to defeat
the object and purpose of the treaty even if it is not in force. Nonetheless, states are not bound by
the treaty provisions until it takes effect. 126In sum, to the extent that signing a BIT sends a costly
signal of a pro-investment climate, signing a BIT will result in an increase of FDI inflows into
developing countries. This proposition, while logically consistent, is grounded in the premise
that the costs involved in signing a BIT are indeed high. 127
There however arguments against these proposition that there is a link between BIT and FDI.
The role of BIT being a commitment device is said not be consistent because hosts often make
all the promises necessary to bring investors but once the investors have come , the host tend
relax and give minimum commitment so that the investors do not leave. The host can weigh as to
whether expropriation of an investors property can outweigh the compensation that can be
brought against the investor and divert from its commitment. The increase in the number of cases
being brought against the states also shows how the states can go against this commitment.
124
Salacuse and Sullivan,2005, supra note 46, 76.
UNCTAD,1998 supra note106.
126
For example, in 2004 the U.S. signed a BIT with Uruguay’s conservative government. Shortly thereafter this
government was replaced by a left-of-center party that insisted on the renegotiation of the treaty. The treaty was
indeed revised in favor of Uruguay, resigned, and only then ratified). In addition, to the extent that the BIT is not
mutually ratified, investors cannot invoke the dispute settlement procedure agreed upon in the treaty (UNCTAD
2005: 8). Thus, signing a BIT may send a costly signal of pro-investment legal and political environment but is
unlikely to credibly commit the government to honor in the future deals they made with foreign investors in the
present. Salacuse ,2007, 37.
127
Guzman (1998) supra note 84, 645
125
34 BILATERAL INVESTMENT TREATIES ENCOURAGING FOREIGN DIRECT INVESTMENT: ZIMBABWE –SOUTH AFRICA BIPPA AS A CASE STUDY. Contrary to the argument above the treaties has be found some authors not be substitutes to
domestic institutions rather complacent.128 This is because the treaties making it impossible for
the host to alter any domestic policy as investors have more rights the domestic investors. The
importance of property rights is watered down by the fact that there has been clear evidence of
where investments have been received where no BIT was not in place. The Japan has been the
one the strongest source of FDI but has not concluded many BITS .Also Brazil one of the top
receivers of FDI has not ratified a single BIT. In 1978 whilst BIT negotiations between China
and the US an approximately $3,5 was invested in China by 350 US companies. The other
argument is if BIT signals a safe investment then it should be signed by more reliable countries
than less. Less reliable should also sign only one treaty to put across the message unlike multiple
treaties which has been characterized by most developing countries. The cost, risk and time spent
on investment arbitration that comes with BIT can be factor to deter small companies to make
their investment decision based on the existence of the treaty.129
In acknowledging the arguments above it however remains pertinent that BIT in some areas has
played a major role in the promotion on FDI. This dissertation subscribe to the notion the
binding obligation of these International rules BIT helps to discipline a country associated with
investment risk. By signing the agreement the host country signals its preparedness to welcome
investors and to treat them fairly. A major factor taken into consideration by many investors is
how profitable the investment will be in the host state. Political risk however affects the
profitability investment especially where there is no recourse in event the investment is affected
by this risk. Bilateral investment treaties offer rights to investors which the host has no power to
interfere with because the treaties limit the ability of states to control the operations of foreign
investments and investors. BIT has been used as tool but governments in persuading its nationals
to at least consider investments in a country which it has a BIT with. BITs are used as confident
building measures that can be used to improve the investment climate signaling a welcome to
investments.
129
35 UNCTAD, 2009,supra note 112
BILATERAL INVESTMENT TREATIES ENCOURAGING FOREIGN DIRECT INVESTMENT: ZIMBABWE –SOUTH AFRICA BIPPA AS A CASE STUDY. Zimbabwe need foreign direct invest as measure to rebuild the economy hence commitment to
BIPPA is of utmost importance as not abiding by it will result another economic upheaval.
Macroeconomic and political stability has been noted as one of the factors that affect an
investment decision. Indirectly a connection can however be determined between BIT and FDI
as BIT seek to strengthen the regulatory institutional environment.130 The growing number of
international disputes is evidence that foreign investors know about the existence of these treaties
and large amounts that have been awarded to foreign can be factor that can lead investors to
invest where there is a BIT in place.131 BIT thus has a great impact on investor confidence
thereby increasing FDI to the host.132 An investor protected by BIT is a stronger position to seek
redress than where there is no BIT in place. BIT, mandatory dispute settlement provisions and
ultimate prospect of compulsory arbitration will cause host country official to think twice before
taking an action towards a foreign investor. Investors have greater sense of security because of
BIT dispute settlement and its outlined rules.
130
ibid
Vandevelde, K (2000). The Economics of Bilateral Investment Treaties. Harvard International Law Journal, 41
(2), 469-502, 186
132
ibid
131
36 BILATERAL INVESTMENT TREATIES ENCOURAGING FOREIGN DIRECT INVESTMENT: ZIMBABWE –SOUTH AFRICA BIPPA AS A CASE STUDY. CHAPTER THREE
Introduction
The high risk associated with poor property rights laws can be a major hindrance to FDI inflows
to the host.133 In considering where to invest one of the factor investors taken into consideration
are political issues that might affect the value of their investments’,134 National policies has
implications on the amount of FDI a country can receive. Liberal economic policies and limited
government intervention is one of the considerations.135 The government has to assure foreign
investors security of investments by their commitment to liberal economic policies which can be
achieved by commitments to international institutions.136 The government should be committed
to encourage FDI because domestic policies that can change easily change discourage investors.
BITs are international agreements that establish terms and conditions for investment by nationals
and companies of one country of another. These treaties thus provide institutional safeguards for
FDI.137
The argument is by signing BITs countries make policies more credible and reassure investors
that their investments are secure.138 Studies on the political economy of BIT have indicated that
their substantive and procedural provisions concede sovereignty over investment activity in
exchange for participation in investment liberal regime that will help encourage FDI.139 BITs aim
to make the regulatory framework for FDI more transparent, stable, predictable and secure and
thus more attractive for foreign investors. Liberalization of FDI entry and operations reduces
obstacles to FDI.140 According to Vandevelde, “BITs potentially promote foreign investments
133
Dolzer Rudolf and Stevens Margete, Bilateral Investment Treaties, Martinus NIjhoff Publishers, 1995, 12.
134
6
Buthe and Milner The Economists "Fools Rush In," August 7, 2004:50.
135
ibid
136
Buthe, Tim. and Milner, Helen. "The Politics of Foreign Direct Investment into Developing Countries: Increasing
FDI through Policy Commitment via Trade Agreements and Investment Treaties" Paper presented at the annual
meeting of the American Political Science Association, Hilton Chicago and the Palmer House Hilton, Chicago, IL,
Aug 20, 2004 <Not Available>. 2009-05-26 http://www.allacademic.com/meta/p59852_index.html [accessed 24-052010] 7
137
ibid
138
ibid
139
ibid
140
UNCTAD. (2000) Bilateral Investment Treaties: 1959-1999. United Nations Conference on Trade and
Development (New York and Geneva)
37 BILATERAL INVESTMENT TREATIES ENCOURAGING FOREIGN DIRECT INVESTMENT: ZIMBABWE –SOUTH AFRICA BIPPA AS A CASE STUDY. flows by reducing political risk and protecting foreign investment against uncompensated
expropriation, harmful exchange controls, and discriminatory treatment by the host state and
even some form of damage to private property”
This chapter depicts how BIPPA provisions can be used by investors as a device to reduce the
risk associated with Zimbabwe by its clear outlined rules. The decision to invest in a country is
determined by a number of factors of which BIT might is one of them. By signing BIPPA
Zimbabwe commits itself to warranty protection of investments under international law thereby
binding itself to this obligation. According to Bergman a BIT can play an important role where
reduced risk is an important factor. Given the controversial land reform in Zimbabwe which
resulted in the violation of many property rights this research perceives how BIPPA can be used
to the advantage of investors thereby encouraging them to invest in Zimbabwe given the unstable
political environment.
BIPPA contains clearly defined and enforced property rights which can be used as a disciplinary
measure in investment area in the case of Zimbabwe. Well-enforced property rights boosts
investor confidence as investors are assured that their property cannot be arbitrary expropriated
without compensation. Hence by granting a wide range of investment rights to investors and
providing an easily accessible resolution of investment disputes BIPPA will help encourage
investors. In context BIPPA will overcome poor property protection associated with the host
country. According to Richards,141 effective structuring of investment treaties has the following
effects: increasing the appeal of investments in markets that are profitable; discourage
government interference with assets and facilitate the assertion and enforcement of claims
against a government which interferes with the assets of the protected investor. Thus one of the
ways to minimize risk arising from the government interference is the effective use of investment
protection treaties.142
The South African trade and investment minister Davies had this to say about the BIPPA,
“Everybody now seems to appreciate that this is a positive agreement which provides investor
confidence that did not exist before. There will be recourse to a whole range of mechanisms in
141
Richards J. Hay, Using Investment Treaties to Mitigate political risk,
http://www.stikeman.com/en/pdf/MinNov07.pdf ,[12-03-2010]
142
ibid
38 BILATERAL INVESTMENT TREATIES ENCOURAGING FOREIGN DIRECT INVESTMENT: ZIMBABWE –SOUTH AFRICA BIPPA AS A CASE STUDY. the event of a dispute.”143 In support of this Werksmans Attorney Director commented that the
treaty was going to offer the best protection to South Africans with investments in Zimbabwe.
On the Zimbabwean side Arthur Mutambara, Zimbabwe’s Deputy Prime Minister assured
potential investors on the significance of the agreement. He said, ‘the agreement had worldwide
significance and application and represented a bill of investment guarantees to any willing
investor. Further “Zimbabwe has signed the BIPPA, not with South Africa, but with the world.
The BIPPA lays out the fundamental conditions that we are going to offer the rest of the world.”
BIPPA seek to create a stable orderly framework as the preamble states the main objective being
to create an appropriate environment for investments to increase prosperity in both
states.144Although the preamble does not create any legally binding rights and duties it still
remains vital for guiding the interpretation of the treaty as to the intention of the parties.145
BIPPA it was concluded mainly to create an conducive environment for investors to invest in
Zimbabwe by according national treatment, relaxed foreign equity restrictions, upholding free
movement of capital and providing political risk cover for the cross-border investments.146
Scope of the Application of BIPPA
The scope of the treaty plays a significant role in determining the investors and the investments
that are protected by its provisions. Like all the other bilateral investment treaties the scope of
BIPPA is found definitions article one. BIPPA contains a broad concept of investment with five
categories of assets being; movable and immovable property, interests in companies (including
both portfolio and direct investment), contractual rights, intellectual property and business
concessions.147 This definition ensures that investments are largely protected because it offers
protection for upright expropriation, breach and the withdrawal of licenses amongst other rights.
It clears the air that used to exist that intangible property cannot be protected by international
143
http://.monstersandrictics.com/news/business/news/aricle_1515799.php/South-Africa-Zimbabwe-sign-bilateralinvestment-protection-bill [accessed 17-02-2010]
144
“Desiring to create favorable conditions for greater investment by investors of either Party in the territory of the
other party: and Recognizing that the encouragement and reciprocal protection under international agreement of
such investments will be conducive to the stimulation of individual business initiative and will increase prosperity in
the territories of both parties.” Zmbabwe- South Africa Bilateral Investment Protection Agreement preamble.
145
Jose Luis, 1994, Bilateral Treaties on the Reciprocal Protection of Foreign Investment, California Western
International Law Journal, Volume 24, 258
146
http://english.peopledaily.com.cn/90001/90778/90858/90866/6704241.html [accessed 09-o4-2010] 147
Article 1 BIPPA 39 BILATERAL INVESTMENT TREATIES ENCOURAGING FOREIGN DIRECT INVESTMENT: ZIMBABWE –SOUTH AFRICA BIPPA AS A CASE STUDY. law.148 A number of cases litigated on the protection of these rights. In these two cases the
question of trademarks being protected under BITs was raised in Le Courturiev v Rey and Carl
Zeiss. 149In recent years as also found in BIPPA it now clear that intangible assets are part of the
definition of property. The aim of definition is to include all the legitimate interests in the
territory of either party whether directly or indirectly controlled by nationals of the other party,
having economic value or associated with the investment.
In order for an investor to have a claim under the treaty the investor should be a sufficiently
connected with the countries that are parties to the BITs in operation. BIPPA thus contains both
the definition of natural and juristic persons.150 The definition of natural person has not been a
problem because it has always been guided by the party’s domestic law as in article 1(a). The
problem has been on the inclusion of juristic persons because it gives a leverage to third parties
whose countries are not part of the contract. The criteria that has been used to determine the
nationality of legal entity has been the country of the company’s incorporation, country of
company’s seat, ownership and control over the company making the investment. Sonarajah
propounds that in protection of juristic person the treaty should ensure protection for wholly
owned subsidiaries of multilateral corporations which are incorporated in a host state party and
which could easily be identified as a foreign controlled corporation.151 Shareholders position on
whether they can bring a claim under BIT was deliberated in ICSID case of CMS Gas
Transmission Company v The Republic of Argentina (Case No ARB/01/8. It was held that there
was still no division between claims by shareholders from those of corporations concerned.
Minority shareholder in joint venture can also be protected if appropriately worded in the treaty
as held in the ICISID tribunal AAPL v Sri Lanka.152 This inclusion of juristic persons gives a
worldwide perspective of BIPPA meaning it’s not only investors from South Africa who can be
protected by BIPPA provisions as South Africa can be used as a conduit to invest in
148
Sonarajah supra note 30 226 ibid
150
Article 1 (a) and (b)
151
Sonarajah supra note 231 152
Asian Agricultural Products Ltd. v. Republic of Sri Lanka, ICSID Case No,. ARB/87/3, Award, 27 June
1990. 149
40 BILATERAL INVESTMENT TREATIES ENCOURAGING FOREIGN DIRECT INVESTMENT: ZIMBABWE –SOUTH AFRICA BIPPA AS A CASE STUDY. Zimbabwe.153 This substantiates the argument that BITs has spillover effects by encouraging
investors not only from the parties but those who can be able to establish their link to the
agreement.
Closely linked to the BITs definition is the time dimensions of the treaty.154 This determines if
the treaty will cover investments made before and after the conclusion of the treaty. Most BITs
cover both existing and future investments. Article 11 of BIPPA incorporates this provision. The
provision protects tenure for all existing and future investments but specifically excluded those
who had been affected by the land reform who had claims against the government. This article
was not welcomed by South Africans.155 They wanted the agreement to be retrospective because
during the land reform a number of farms were expropriated without compensation including
that of South Africans.156 In contention of the exclusion clause Afriforum, a South African civil
society organization wanted to stop the signing of the agreement. 157
On an application brought on behalf of Louis Fick, a South African whose farm had been
confiscated they argued that the provision was discriminatory making it unlawful.158 In their
view this provision had the implication of exonerating Zimbabwe from its pending claim on the
SADC claim by Campbell and others.159 The matter was however settled out of court as it was
made clear that the agreement was not going to be used by Zimbabwe as a scapegoat from the
SADC Tribunal ruling and the South African Trade Minister and Industry emphasized that
BIPPA was not going to affect existing rights and remedies in terms of other sources of
international law specifically that of the SADC Tribunal.160
153
for example, Canada or Chinese investors might “route” their SA-bound investments, via a South African
subsidiary, so as to avail themselves of the treaty protections extended to South African companies . in the
Netherlands-SA investment treaty.
154
Salacuse and Sullivan,2005, supra note 46, 664.
155
John Brand and Mieke Krynauw, Implications and ramifications of Zimbabwe/SA agreement on investment
protection, 05 February 2010, http://www.legalbrief.co.za/article.php?story=20100205110339837, [accessed05-042010]
156
ibid
157
ibid
158
ibid
159
ibid
160
ibid
41 BILATERAL INVESTMENT TREATIES ENCOURAGING FOREIGN DIRECT INVESTMENT: ZIMBABWE –SOUTH AFRICA BIPPA AS A CASE STUDY. In the argument of BITs encouraging FDI the way the host treat existing investors should be
approached with caution as it can have implications on the confidence investors will have upon
the host. Existing investors are potential source of new investments.
161
BITs thus do not only
cater for future investments but can also have the effect of encouraging foreign investment by
catering for the needs of existing investments.162 However given the fact that BIPPA was not
only going to encourage FDI by certainty for investors in Zimbabwe but also help in the
economic recovery of and stabilization it was only sensible that BIPPA be concluded with no
retrospective property clause. The inclusion of prior investment can have the effect expanding
the investment rights and treatment placing unexpected burden on the host. BIPPA aimed to start
a new Chapter in the investment area between the two countries making it difficult to include
historical claims arising from the land reform.163 Besides an out of court agreement made it clear
that BIPPA was not going ‘immunize’ Zimbabwe from its International claims. To justify this
position to on the exclusion of the claims in BIPPA provisions one needs to note of the following
argument;
According to the Vienna Convention, there is usually a presumption against retrospective
application of a treaty. This is also true for BITs. The prevailing trend is to provide protection
for both future investments already established at the date of entry into force of the agreement.
Furthermore, it is stated that the agreement shall not apply to any investment-related dispute or
claim that arose or was settled before the entry into force of the BIT. 164
161
Salacuse and Sullivan,2005, supra note,46. 665
ibid
163
Salacuse and Sullivan,2005, supra note 46, 668
164
Republic of South Africa,.Bilateral Investment Treaty Policy Framework Review: Government Position Paper
http://www.pmg.org.za/files/docs/090626trade-bi-lateralpolicy.pdf pg 33
162
42 BILATERAL INVESTMENT TREATIES ENCOURAGING FOREIGN DIRECT INVESTMENT: ZIMBABWE –SOUTH AFRICA BIPPA AS A CASE STUDY. Admission and Establishment
Traditionally states had the right to control and limit admission but recent trend trends has seen
the power of the states being minimized.165 There are two approaches in international
investments agreements.
166
There is the admission model where entry is in accordance with the
laws and regulations of the host country. This model does not precisely stipulate key obligations
applying to established investments.167 Then there is the pre-establishment model designed for
both protection and liberalization.168 Provisions of national treatment are extended to the
establishment period removing any barriers to access. This category of BITs imposes a higher
degree of discipline on the contracting parties.
Article 2 stipulates the requirements that the states need to be adhere in order to create conducive
environment for the encouragement of investments. According to BIPPA admittance of foreign
investment by the host will have to confirm to the domestic laws and this has always been the
case for most developing countries that the treaty applies only to investments that is in
accordance with the with the host legislation. This leaves room for Zimbabwe to apply a
mechanism for screening the investment it might want to have in place for the development of
the state. To make it easy for the investors to establish their investments in the host the necessary
permits, licensing agreements and contracts for technical, commercial or administrative
assistance has to be issued in accordance with the domestic law. For transparency in the financial
position and results of activates related to investments BIPPA set out the requirement the
investments will be subject to bookkeeping and auditing according to national or international
standards and ensuring results are made accessible to the investor. This part of BIPPA plays an
important role in the promotion of investments as they will as there will be certainty and
transparency in the admission and establishment of FDI. This model of in not pre-establishment
because this type of model has implications of stifling local investment as they find it difficult to
compete with large corporation that might invest in the host169
165
UNCTAD 2007 ,INVESTOR–STATE DISPUTE SETTLEMENT AND IMPACT ON
INVESTMENT RULEMAKING, http://www.unctad.org/en/docs/iteiia20073_en.pdf [ accessed 30-05-2010]
166
BILATERAL INVESTMENT TREATIES 1995–2006: TRENDS IN INVESTMENT RULEMAKING , 141
167
ibid
168
ibid
169
Salacuse and Sullivan,2005, supra note 46667
43 BILATERAL INVESTMENT TREATIES ENCOURAGING FOREIGN DIRECT INVESTMENT: ZIMBABWE –SOUTH AFRICA BIPPA AS A CASE STUDY. Treatment of Investments
Fair and Equitable treatment
The requirement provides that both contracting party shall guarantee fair and equitable treatment
to investments belonging to nationals of either party. BIPPA stipulates that no interference will
occur with the investments through arbitrary or discriminatory measures in the operation,
maintenance, utilization, enjoyment or disposal.170 Investments thus have to be accorded full
protection and security not less that required by international law. This requirement brings
transparency required by most investors and help to stabilize conditions to develop investor’s
expectations. There is no clear interpretation of this provision hence in TECMED v MEXICO171
case and the Maffezini v, Spain172 case the ICSID tribunals held that a violation of this obligation
took place if in the light of good faith under international law the host state acted against the
legitimate and basic expectations of the investor.
Failure to ensure transparency in the function of public authorities can make the state to held
accountable. Further in AAPL v Sri Lanka173 it was held that the government is in breach if does
not take any measures that fall within the normal exercise of government to impose law and
order that could help protect the investors property. The protection warranted with this provision
is not as straight forward as it sounds but given the jurisprudence an investor can the provision
warrants greater leverage for the investor to utilize this provision for ensuring protection of
property.
170
Article 3 (1)
In TECMED v. Mexico, the conduct of various Mexican public officials was held to be inconsistent and
insufficiently transparent and thus contrary to the principle of fair and equitable treatment of foreign investors. In
this case, the renewal of the license for the operation of a hazardous waste landfill by a Spanish investor in Mexico
was refused on different grounds, following a period of strong local protests and political changes on the municipal
level. Considering the behavior of the Mexican authorities in the light of the standard of fair and equitable treatment
embodied in the Spanish-Mexican bilateral investment treaty, the tribunal found(T´ecnicas Medioambientales
TECMED S.A. v. Mexico, 43 I.L.M. 133, ¶ 122 (ICSID (W. Bank) 2003)
172
Emilio Agustin Maffezini v. The Kingdom of Spain, ICSID Case No, ARB/97/7, Decision on Jurisdiction, 25
January 2000; Award, 13 November 2000; Rectification of Award, 31 January 2001.
173
AAPL v Sri Lanka supra note 152 171
44 BILATERAL INVESTMENT TREATIES ENCOURAGING FOREIGN DIRECT INVESTMENT: ZIMBABWE –SOUTH AFRICA BIPPA AS A CASE STUDY. National treatment and Most Favored Treatment
A foreign investor has confidence in the host where he knows that investments will not be
subjected to any form of discriminations. National treatment grants foreign investors in like
circumstances treatment no less favorable than the treatment of nationals. Most favored Nation
treatment treaty all foreign investors alike irrespective of their nationality.174 The fact that two
helps to create investment neutrality makes it appealing to investors. MFN in the territory of the
other party oblige observance contractual obligation with investors.175 This provision is of
relevance in case of Zimbabwe were the land reform expropriations were carried out in a
discriminatory manner. Article 3(2) and (3) of BIPPA reads:
(2) Each Party shall in its territory accord to investments and returns of investors of the
other party treatment not less favorable than which its accords investments and returns
of its own investors or to investments and returns of investors of third state.
(3) Each Party shall in its territory accord to investors of the other Party treatment not
less favorable than that which it accords to its own or investors of any third state.
It remains not in international investment law clear if the MFN clause can be used by investors to
establish jurisdiction over investment disputes with the host state. It was concluded that if the
MFN is to apply to dispute settlement it should be clear that the parties intended it to be. There
have been three major cases dealing with this matter. In Maffezini176 the inclusion of “all matters
are subject to this agreement” meant that the parties intended the MFN to be extended to the
dispute settlement provision of the BIT between Chile and Spain. This was however not the case
in Salini177 and Plama178 cases where it was unclear. It was held that the MFN clauses in the case
of RSA-Korea BIT was only limited to the substantive provision in relation to the investment
treaty.
174
Vandevelde J Kenneth, Investment Liberalisation and Economic Development: The Role of Bilateral Investment
Treaties, Columbia Journal of transnational Law, 1998, 507-514.
175
ibid
176
ICISID Case No. ARB/97/7, Decision of January 25 2005
177
ICISID Case No. ARB/02/13, Decision of November 15, 2004.
178
ICISID Case No. ARB/03/24, Decision of February 8, 2005.
45 BILATERAL INVESTMENT TREATIES ENCOURAGING FOREIGN DIRECT INVESTMENT: ZIMBABWE –SOUTH AFRICA BIPPA AS A CASE STUDY. In case of BIPPA it is clear that the MFN clause is not extended to dispute settlement .The
application of minimum standard of treatment allows international inspection of the treatment of
by the host. When an entry has been made national treatment can also be used as weapon by the
investor against performance requirements such as export quotas or local purchase requirement
as they are not required for local entrepreneurs. In NAFTA case of ADF v United States179
performance requirements were held to be in violation of the national treatment provision.
BIPPA however excludes the application of national treatment and MFN to regional economic
cooperation, any agreement in relation to taxation and domestic law designed to protect those
disadvantaged by unfair discrimination in the territory.180 Also exempted in Article 3(5) are
development finance institutions. Although national treatment to the advantage of foreign
investors in administrative control over them it can also work in reverse because a measure taken
against the national can also affect a foreign investor. The MFN does not apply to the preestablishment phase and this is done to protect local investors.
Compensation of loses
In case of Zimbabwe were the political situation is not yet stable although the unity government
had tried to stabilize the situation the provision for compensation for any losses for destruction
during wars and national emergencies gives the investors security. BIPPA thus contains the
following provision,
“Investors of one party whose investments in the territory of the other party suffer losses owing
to war or other armed conflict , revolution , national emergency, revolt, insurrection or riot in
the territory of the of the latter Party shall be accorded by the latter party treatment, as regards
to restitution, indemnification, compensation or other settlement, not less favorable than which
the latter party accords to its own investors or to investors of any third state.”
The Asian agricultural Products (AAPL) v Sri Lanka was the first case to deal with this provision
on an international tribunal.181 It was ruled that in times of civil conflicts, the host state has an
obligation to confer adequate protection to foreign investments and failure to do resulted in
liability of the state. As result of this ruling compensation was awarded to the foreign investor.
179
ADF Group Inc. v. United States of America (ICSID Case No,. ARB(AF)/00/1),
http://www.state.gov/documents/organization/5963.pdf [accessed 04-5-2010]
180
Article 4 (a) and (b)
181
(AAPL) v Sri Lanka ,Supra note 152 46 BILATERAL INVESTMENT TREATIES ENCOURAGING FOREIGN DIRECT INVESTMENT: ZIMBABWE –SOUTH AFRICA BIPPA AS A CASE STUDY. Expropriation
BIPPA like most BITs has always guarded against this possibility, and continue to express
investors’ fears of being expropriated unlawfully. States are not prohibited from expropriation
but the right of host countries to expropriate or nationalize foreign property, subject to certain
requirements,182 which has been recognized in BIPPA. The prerequisite conditions for lawful
expropriation of foreign investors by host countries have been considered to be the following: it
had to be taken for a public purpose, on a non-discriminatory basis, under due process of law and
based upon the payment of prompt, adequate and effective compensation.
In Zimbabwean case the expropriation provision plays an important role. Foreign investors were
affected by the policies that were implemented permitting the Zimbabwean government to take
property without restrictions, resulting in the expropriation of white-owned land for distribution
to black farmers without compensation. Amendment 17183 was questioned in Campell184 and
Funnekotter.185 In the Campell case who was of British origins it was found ruled by the SADC
tribunal that Zimbabwe’s expropriation process had discriminated against the applicants on the
grounds of race and that fair compensation was to paid to applicants for the properties which had
been compulsorily acquired. Protected by the Netherland and Zimbabwe BIT Funnekotter
brought the dispute under the international Center for Investment Disputes. In this ruling the
Zimbabwean government was found to have unlawfully expropriated the land by not
compensating the applicants thereby violating the bilateral investment treaty.
Expropriations are the most fatal interference with property even though they are prima facie
lawful.186 Political risk in investment is also associated with the risk faced by an investor that the
host will confiscate the investor’s property rights situated in the host country.187 Therefore, one
of the most important guarantees an investor can have is a guarantee of compensation if an
182
Tobin, Jennifer, 2007, supra note 60
Constitution of Zimbabwe Amendment No. 17, Act 5 of 2005
184
Campbell and Another v Republic of Zimbabwe (SADC (T) 03/2009) [2009] SADCT 1 (5 June 2009) ,
http://www.saflii.org/sa/cases/SADCT/2009/1.html (accessed 17-05-2010)
185
Bernardus Henricus Funnekotter & Others v Republic of Zimbabwe supra note 22
186
Tobin, Jennifer, 2007, supra note 60
187
N. Stephan Kinsella ,Paul E. Comeaux ,Reducing Political Risk in Developing Countries: Bilateral Investment
Treaties, Stabilization Clauses, and MIGA & OPIC Investment lnsurance, Copy right © 1994 by the New York Law
School Journal of International and Comparative Law, 1
183
47 BILATERAL INVESTMENT TREATIES ENCOURAGING FOREIGN DIRECT INVESTMENT: ZIMBABWE –SOUTH AFRICA BIPPA AS A CASE STUDY. expropriation occurs. BIPPA article 5 includes a provision on expropriation and compensation in
order to protect investors against the risk of unlawful expropriation.
Investments of investors of either Party shall not be nationalized , expropriated or
subjected
to
measures
having
effects
equivalent
to
nationalization
or
expropriation(hereinafter referred to as expropriation) in the territory of the other party
expect for public purposes, under the due process of law, an a non-discriminatory basis
and against prompt, adequate and effective compensation. Such compensation shall at
least equal to market value of the investment expropriated immediately before the
expropriation or before the impending expropriation became public knowledge,
whichever is the earlier, shall include interest at a normal commercial rate until the date
of payment, shall be made without delay and shall be effectively releasable.
The provision contains strong disciplinary measures against Zimbabwe. It offers protection
against direct and indirect expropriation or nationalization or any other comparable measures
affecting investments made in either territory of the parties. Investor needs to be assured that
even if they lose their property they will be a remedy. In terms of compensation BIPPA188
guarantees that there will, “prompt, adequate and effective compensation equivalent to the
market value, including interest at commercial rate. Such a requirement is likely to be one of the
most effective in terms of protecting the value of the investment because other nations are more
willing to enforce a damages award based on this obligation and because Zimbabwe would be
less willing to expropriate in the first place if it would have to pay for the property it confiscates.
The issue of what determine the appropriate compensation has been raised and that it should
actually be left to arbitrators to assess this matter. This compensation standard is the “Hull
Formula,” which is promoted by the United States but is not universally accepted as customary
international law.189 This standard better protects the investor by insisting that the host nation
pay the true economic value of the investment which is taken, rather than “appropriate”
188
189
Article 4
Guzman 1998, supra note 84 48 BILATERAL INVESTMENT TREATIES ENCOURAGING FOREIGN DIRECT INVESTMENT: ZIMBABWE –SOUTH AFRICA BIPPA AS A CASE STUDY. compensation an in adequate standard which is often favored by less developed countries.190 It
has propounded that standard of valuation as that indicated in BIPPA requires the host to pay full
compensation. Further it gives any investor affected by expropriation the right to state their case
in court of law or other independent forum. In addition to compensation being paid without
delay, the provision include, interest from the date of the expropriation, be fully realizable, and
be freely transfer able at a market rate of exchange.
Although most BITs use the terms expropriation and nationalization, most do not attempt to
define either of the terms or try to clarify what the difference between said terms would be.191
The wording used in various BITs also incorporate additional language that extend protection to
actions of a host country that may be ‘tantamount’ or ‘equivalent’ to expropriation or that may
have an ‘effect that is equivalent’ to expropriation. The term ‘indirect expropriation’ is also
encountered. What constitutes expropriation remains a deeply contentious issue.192 The concern
is n heightened by an early NAFTA Chapter 11 investment arbitration, Metalclad v. Mexico,193
where an arbitral tribunal ruled that expropriation could be defined broadly, so as to include not
only literal seizure or destruction of property, but also “covert or incidental interference with the
use of property which has the effect of depriving the owner, in whole or significant part, of the
use or reasonably-to-be-expected economic benefit of property…”In the ruling, the tribunal gave
short shrift to the purpose underlying the government interference, instead setting forth a test
which focused upon the degree of interference suffered by the investor. A deprivation “in whole
or significant part”, would constitute an expropriation contrary to the treaty, no matter the
purpose underlying that deprivation.194
In Compania del Desarrollode Santa Elena SA v Costa Rica the ICISID panel emphasized the
ample authority for the proposition that property has been expropriated when the effect of the
190
RUDOLF DOLZER,THE IMPACT OF INTERNATIONAL INVESTMENT TREATIES ON DOMESTIC
ADMINISTRATIVE LAW, INTERNATIONAL LAW AND POLITICS, [Vol. 37:953, 958-959
191
M, Michael Reisman nad Robert D. Sloane, indirect Exprpriation in BIT Generation, The British Law
Journal,2003.134
192
ibid
193
Metalclad Corporation v. United Mexican States, ICSID Case No. ARB(AF)/97/1, Award of the Tribunal,
Aug.30, 2000, at para 103
194
ibid 49 BILATERAL INVESTMENT TREATIES ENCOURAGING FOREIGN DIRECT INVESTMENT: ZIMBABWE –SOUTH AFRICA BIPPA AS A CASE STUDY. measures taken by the state has been to deprive the owner of the little possession and access to
the benefit and economic use of his property.
195
There is not much difference between indirect
and creeping expropriations which has been defined to mean lack of vividness and transparency
not only of formal regulatory or otherwise indirect expropriations, which may be identified more
closely with few violate events.
Transfers of Investments and Returns
This Article196 assures investors of their ability to move their funds from the place of the
investment to the home state. In the light of the importance of transfer obligations to foreign
investors, a country wishing to attract investment stands therefore to benefit from the inclusion
of a comprehensive and sufficiently detailed transfer provision. But a host country may also seek
qualifications, the most important of which relates perhaps to the ability of the country to impose
restrictions on transfers in response to balance-of payments crises.
The ability of an investor to transfer income and capital is important consideration for many
investors. The exchange risk is one of greatest risk associated with international investment
flows hence a reduction in the risk of currency exchange controls can be a major significance to
an investor.197 This provision gives investors security against certain measures in the economy of
Zimbabwe that may have temporary or permanent implications on the exchange control and
affect the free transfer abroad of liquid assets. Most BITs like BIPPA incorporates the
requirement of free transfer of liquid assets in freely convertible currency without delay at the
market rate of exchange applicable. BIPPA stipulates that the transfer has to be done with
accordance with domestic laws in force but not hinder the free and undelayed transfer of funds.
Any restriction to the repatriation is prohibited; they should be free transfer of assets to and from
the host. This provision is very important in the encouragement of FDI but can also work to the
detriment of the host. The more freedom investors have on the transfer of income can have a
huge impact on balance of payments and foreign exchange used to pay for essential goods and
services for the good of the country.
198
This can be of major implications on Zimbabwe’s plans
195
Columbia Del Desarrollode Santa Elena SA v Costa Rica, ICISID, Case NO ARB/96/1 Award of February 2000,
439 ilm 1317, 13330 para 77.
196
Article 6
197
Rudol Dolzer, Supra note 190, 198
Jesawald and salacuse supra note 46,668-670
50 BILATERAL INVESTMENT TREATIES ENCOURAGING FOREIGN DIRECT INVESTMENT: ZIMBABWE –SOUTH AFRICA BIPPA AS A CASE STUDY. to rebuild the economy. That is why in most cases transfer of funds is one of the sticky areas in
negotiations of BITs. While the host seeks to limit this provision the home of investors seek a
broad unrestricted guarantee on money transfers.199 BIPPA provision on transfer of funds is
unlimited which of major concern for Zimbabwe
This provision covers a broad spectrum of issues being the general nature of investors’ rights to
make transfers, the payments that are covered by the right to make transfers, the nature of the
currency with which the payment maybe made, the applicable exchange rate and the time within
the host must allow the investor to make such transfers.200 This provision offers guarantee to
investors especially in the case of Zimbabwe were the issue of currency can be a major obstacle.
The argument against is by legalizing the use of different foreign currency it makes it easier for
investors because no license will be required to trade in foreign currency.201 It will be easier for
foreign investors to repatriate their funds in whatever currency but it can also impact most
because Zimbabwe is great need for the same currency to stabilize the economy. Although
highly burdensome exchange control regulations may constitute an expropriation, exchange
control regulations which do not rise to this level can still be very costly to investors hence
provision of this clause is made.202
Dispute Settlement Provision
The dispute settlement provision of BITs is the most important provision to most foreign
investors.203 By signing BITs a state commits to some legal rules, guarantees of high standard of
treatment. These legal rights guaranteed under international law of investment can only have
value if they can be implemented. The ability to access international arbitration encourage
investors because they is usually the assumption by investors that local courts in developing
countries will lack technical competence or neutrality to adequately resolve investment disputes.
The provision for dispute settlement help states to overcome commitment problems as
independent judicial system will ensure that such rules are enforced without bias. Dispute
settlement provisions help to guarantee fair and impartial resolution of disputes and to avoid
199
Ibid 666
Ibid 667
201
E. Magoma,Investment opportunities in Zimbabwe, paper presented , 30 March2009,
http://www.sadc.int/fanr/agricresearch/icart/meetings/ProceedingsICARTGranteesReviewWorkshop.pdf
202
Sonarajah supra note 30 at 238
203
ibid 200
51 BILATERAL INVESTMENT TREATIES ENCOURAGING FOREIGN DIRECT INVESTMENT: ZIMBABWE –SOUTH AFRICA BIPPA AS A CASE STUDY. disruption of investment flows.204 There are two broad models of dispute settlement that exist in
international agreements and these are also finding in BIPPA. There is the State-to- State dispute
resolution which is available only among states party to an agreement. It usually involves the
interpretation of treaty in question.205 Then is there is the Investor-State mechanism which is the
most popular which allows private investors to submit claims against the host country to
international arbitration.206
Article 7 of BITs provides for the investor state arbitration were an investor can directly initiate
arbitration with the host state. This provision is the most attractive to investors because it allows
power to private persons to submit a claim against the host to an international arbitration. BIPPA
provides that if a dispute arises between the investor and a party it shall be settled by friendly
negotiations between the two parties. However if the dispute has not been settled within six
months it may brought to the competent court of the host for arbitration. The issue of a
competent court in this case works on the South African side because it can be difficult to find
one in Zimbabwe. Hence the end result is international arbitration because exhaustion of local
remedies is not a prerequisite. The following article 8 provides disputes between parties.
Negotiation is provided as the starting point but if the parties cannot reach an agreement the next
and final stop will arbitral tribunal. The applicable law being the law of the host sate, investment
contract and the rules of international law.
Applicable laws to BIPPA
On the applicable laws to investment disputes there are three sources of substantive legal rules
that must be taken into consideration in the resolution of any dispute.
207
These are municipal
laws of the host including relevant international treaties that are binding upon the state, the
investment treaty itself and the general principles of international law.208 An investment is an
204
Kenneth J vandevelde. The Political economy of Bilateral Investment Treaty(1998) 92
Article 7
206
Article 8
207
Andrew Newcombe, Lluís Paradell – 2009, Law and practice of investment treaties standards of treatment
Political Science,
http://books.google.co.za/books?id=4fuB9D9kC&pg=PA79&lpg=PA79&dq=choice+of+law+clause+in+investment
+treaties&source=bl&ots=prxbSIWJ7O&sig=2F9_E1RDLT8h7RzVylA69CKGOdc&hl=en&ei=3k0FTOM4vu4gb6
yDLDg&sa=X&oi=book_result&ct=result&resnum=1&ved=0CBcQ6AEwAA#v=onepage&q=choice%20of%20la
w%20clause%20in%20investment%20treaties&f=false , 4
208
Zacky Douglas, The Hybrid and Invement Treaty Arbitration, The British Year Book of Internal Law 2003, 195234
205
52 BILATERAL INVESTMENT TREATIES ENCOURAGING FOREIGN DIRECT INVESTMENT: ZIMBABWE –SOUTH AFRICA BIPPA AS A CASE STUDY. embodiment of property rights, whereas the minimum standards of investment protection treaties
are derived from international law. An investment relationship has been concluded to involve
domestic law as well as international law. The host state law regulates a multitude of technical
questions such as admission, licensing, labor relations tax, foreign exchange and real estate.
Whereas International Law is relevant for such questions such as international minimum
standard of treatment of aliens, the protection of foreign owned property, especially against
illegal expropriation, interpretation of treaties.
BIPPA like most BITs refer to contractual rights among recognized categories of investments
covered by the minimum standard of investment treatment. In order for BIT to have an effect on
FDI contractual right should be interpreted narrowly. The inclusion of shares ensures the
protection of an investment is reliant upon securing upon securing those shares in accordance
with the relevant municipal law where the company is incorporated. Although this rule is subject
to exception, legal ownership of shares arises upon entry onto the share register of the host.209
Once the right has been recognized by municipal law of the host state, the treaty regime takes
over. The subsequent changes in municipal law or other acts attributable to the host state that
affect the right of investors must be assessed against the minimum standards of protection in the
invest treaty.210
The host cannot therefore escape liability to an investor under the investment treaty regime by
passing a law to the effect that the title of shares obtained by acceptance of shares certificate
shall no longer be recognized of the investor acquired them lawfully.211 Also if the investor’s
shares remain stringent because of the municipal law of host have an effect of rendering those
shares worthless, it will be open to the treaty tribunal to find prohibition against indirect
expropriation or other minimum standard of treatment has been violated by the host state. 212
The court found that the tribunal complied with the choice of law clause in Netherlands-Czech
Republic by applying relevant sources of law, being primarily international law.213 An issue
209
Growers Principles of Modern Comapany Law, 1997 6th edition 328.
ibid
211
ibid
212
D.O Conell, International law Vol 2 1970 2nd ed
213
Cze republic v CME Czech Republic BV( Svea Court of Appeals 15 May 2003) reproduced and translated in
2003, 42 ILM, 919,965.
210
53 BILATERAL INVESTMENT TREATIES ENCOURAGING FOREIGN DIRECT INVESTMENT: ZIMBABWE –SOUTH AFRICA BIPPA AS A CASE STUDY. pertaining the rights underlying a covered investment is relevant in case of establishing the
tribunal jurisdiction and the liability. The decision of the tribunal in TECMED SA v United
Mexican States214 illustrates an approach to preliminary issues concerning rights that comprise
investment. The claimant principal claim was that the failure to renew Cytrars operating of its
investment license under Spain –Mexico amounted to expropriations. The tribunal ruled that
Mexico had used its regulatory power to revoke Cytra’s License in a manner inconsistent with its
obligations under the investment treaty.
BIPPAs choice of arbitration was the International Centre for The settlement of Investment of
Investment Disputes (ICSID) and the applicable rules of the United Nations Commission on
International Trade Law (UNICITRAL).
The option of the dispute to be submitted ICSID helps to promote investment because under the
Convention the host states and the investor have confidence that their case will be resolved
effectively according to the legal and economic merits of the case.215 One of the fundamental
protection of ICISID system is that consent to arbitrate is not unilaterally irrevocable. In Alcoa
Minerals of Jamaica Inc. v. Government of Jamaica,216 an ICSID panel unanimously assumed
jurisdiction over an investment dispute and confirmed that a valid consent given by the host is
irrevocable. Hence investors are assured to rely on ICISID arbitration without fear that any other
party tries to solve dispute within other international options Arbitration under the ICISID is
wholly exempted from the supervision of local courts.217 ICISID convention makes it mandatory
that all the members recognize and enforce ICISID awards.218 A member of the ICISID thus has
to enforce ICSID awards immediately under their domestic laws. When they is clear reference of
the ICISID like in BIPPA award are binding and final. There is no appeal and the awards have
the benefit of being supported by the World Bank, which can bring commercial pressure to bear,
so that awards are compiled with. Recognition thus cannot be denied by the domestic courts. The
inclusion of ICISID in BIPPA helps to precipitate the goal of investment promotion. The
214
Award 29 May 2003, Case NO ARB(AF) /oo/2/2004 43 ILM133
UNCTAD 2003 supra
216
Zacky Douglas supra note 208
217
ibid
218
ibid 215
54 BILATERAL INVESTMENT TREATIES ENCOURAGING FOREIGN DIRECT INVESTMENT: ZIMBABWE –SOUTH AFRICA BIPPA AS A CASE STUDY. preamble of ICISID recognizes the role of private international investment for economic
development.
Article 42 of ICISID provides that in the absent of the agreement between the parties, the
tribunal shall apply the law of the host sate and applicable rules of international law. In the
tribunal reaching a decision by majority vote s, the decision will be final and binding upon
parties. ICISID members like Zimbabwe have to recognize and enforce the awards in their
territory as if they were final judgment of the state court. UNCITRAL article 1(2) of the Rules
provides that these rules shall govern the arbitration except that were any of the Rules is in
conflict with provision of the applicable to the provision shall prevail. Hence UNICITRAL Rules
contemplates the application of national law. The economic rational of these protections afforded
to individual or legal entity is to promote and encourage direct foreign investment on the
economies of contracting states.
Subrogation of claims contained in article 9 is a provision incorporated mostly by the home to
encourage investments in the host. The home of investors provides insurance for corporations
that make investments in the other party state.219 The provisions then help the home state to be
able recoup claims against the host after paying out the claims through the insurance schemes for
foreign investments run by the investors.220 Although this provision helps to promote investment
flows it also serves the foreign policy goals of the home state especially where foreign
investment is in resource field.221 In this case Zimbabwe has been one of the major trading
partners of South. Zimbabwe is also a country that is endowed with resources hence in as much
as this provision is to encourage investments to Zimbabwe it also going to be to the benefit of
South Africa. The provision secures investors because if they suffer damage and has been paid
off by the insurance agency the home country will pursue the claim on their behalf. To eradicate
questions about the transfer of rights subrogation of rights applies as well, to rights of free
219
Sonarajah, 2004, supra note 30 at 256
ibid
221
ibid 220
55 BILATERAL INVESTMENT TREATIES ENCOURAGING FOREIGN DIRECT INVESTMENT: ZIMBABWE –SOUTH AFRICA BIPPA AS A CASE STUDY. transfer and arbitration covered by BIT. The insurer can also utilize the contractual obligations
on the treaty on compensation. 222
It is clear from the above that like most BITs BIPPA is one-sided mostly catering for the rights
of investors. The host is left with little if no space to regulate investments once they enter the
country. This being the reason these BIPPA should play an important role to warrant protection
to foreign investors especially in Zimbabwe were the situation is changing but not yet stable. A
BIT in case of Zimbabwe aims to signal that past policies relating to foreign investments have
undergone dramatic change.
222
Ruldolf and Dolzer supra at 263
56 BILATERAL INVESTMENT TREATIES ENCOURAGING FOREIGN DIRECT INVESTMENT: ZIMBABWE –SOUTH AFRICA BIPPA AS A CASE STUDY. Chapter 4
Introduction
In the previous chapter it was highlighted that BIPPA has the effect of increasing FDI by
credibly committing Zimbabwe to protect the property of investors. The clear outlined rules
lowers risk and increases expected returns on investment. Committing to BIT has implications in
on the host. In signing BITs a country trade off its sovereignty in relation to the benefits of
increased FDI.223 The impact on regulatory ability introduces an additional dimension of costbenefit analysis to the initial sovereignty trade of indicated. This will entail an examination of the
positive and negative impact of these treaties. By binding themselves to international law
protection countries surrender some of their domestic policy independence.224 BIT allows
governments to commit themselves a country more attractive place to invest. Committing to
BITs involves costs for the host.225 The signing of BITs involves an assessment whether it is
beneficial for the host that’s why this chapter seeks to highlight the negatives and the benefits of
signing BIT. Bilateral investment treaties are double edged as the attract investors they also
constrain government policy making.226
Sovereignty Limitations Bilateral investment treaties like many other treaties limit sovereignty. These treaties have the
impact of limiting the sovereign control of investments that takes place within the territory of the
host state. 227In particular, an investment treaty will limit the sovereign right of a state to subject
foreign investors to its domestic administrative legal system.228 All the main clauses typically
included in an investment treaty operate in various ways to define and narrow the types of
domestic administrative regulation to which foreign investors must subject themselves.229 This is
a response to investors’ concern for the predictability and stability of the legal framework
223
Sonarajah supra note 30 at 365
ibid
225
Elkins, Zachary, Guzman, Andrew T, & Simmons, Beth. (2006). Competing for Capital: The Diffusion of
Bilateral Investment Treaties, 1960-2000. UC Berkeley: Berkeley Program in Law and Economics. Retrieved from:
http://escholarship.org/uc/item/0b87871 [ accessed 04-05-2010]
226
Luke Eric Peterson, Research Note: Emerging Bilateral Investment Treaty Arbitration and Sustainable
Development, August, 2003, available at: http://www.iisd.org/publications/publication.asp?pno=562 [accessed 0405-2010]
227
Sonarajah 2004,supra note 30 at 366
228
Luke Eric Peterson supra note 225 229
ibid 224
57 BILATERAL INVESTMENT TREATIES ENCOURAGING FOREIGN DIRECT INVESTMENT: ZIMBABWE –SOUTH AFRICA BIPPA AS A CASE STUDY. governing their investments. Foreign investors’ expectations of administrative stability and the
host state’s expectations of the sovereignty to control its administrative law are brought into a
balance by an investment treaty that essentially favors the interests of foreign investors when
compared to the general rules of international law applicable in the absence of a treaty.
Countries has actually enacted or amended their domestic policy laws in order to suit with the
BIT that will be place. Zambian government abolished the 1991 code and enacted a new code
that permits payments in order to make similar with those that was given in Zambia-Germany
BIT.230
Zimbabwe Indigenization and Economic Empowerment Regulation When a country signs a bilateral investment treaty any passing of rule that affects investors is
subject to review by the foreign tribunal.231 The question arises whether BIPPA has this right to
limit domestic policy in Zimbabwe. By signing BIPPA Zimbabwe cedes its sovereignty for FDI.
This brings to question the proposed Indigenous law in Zimbabwe and the impact of BIPPA on
the law. The following discussion shows how BIPPA can protect potential investors in
Zimbabwe upon domestic law with a look at the proposed empowerment act of Zimbabwe.232
The law was seen as an extension of the government's policy of seizing white-owned farms and
giving them to locals, which started more than 10 years ago.233 The land reform has been seen
by as failure as many of the farms that were taken remain unutilized and impoverished many
Zimbabweans. The law is said to have a pose a threat to foreign direct investment, so vital to the
economic growth of the country.234
230
Muthaika A Peter, Creating an attractive Investment Climate in the Common Market for Eastern and Southern
Africa( Comesa) Region, foreign Investment Law journal, ICISID Review, 1997, pg 272.
231
Luke Eric Peterson supra note 225
232
Indigenisation Economic Empowerment( General ) Regulations 2010.
233
Annie
Lowrey
,Monday,
March
1,
2010Zimbabwe's
terrible
new
business
law,
http://blog.foreignpolicy.com/posts/2010/03/01/zimbabwes_terrible_new_business_law [ accessed 23-05-2010]
234
Germany investors have already warned that they will stop investing in Zimbawe under the law. Business And
Civic Society Dismisses Indigenous Act, 15/03/2010, http://news.radiovop.com/index.php/business/zimbabwebusiness/3411.html, John Robertson, a Harare- based economic commentator, told the DPA news agency that the
move would put a stop to any possibility of new investment. He further commented that after a decade of strife
Zimbabwes has in 2009 shown a growth of 4.7. Multinational Companies were indicated as the most affected by the
law
an
example
being
South
Africa's
Impala
Platinum
and
Rio
Tinto.
http://english.aljazeera.net/news/africa/2010/02/201021053053124242.html
58 BILATERAL INVESTMENT TREATIES ENCOURAGING FOREIGN DIRECT INVESTMENT: ZIMBABWE –SOUTH AFRICA BIPPA AS A CASE STUDY. According to Indigenization law, companies owned by non-indigenous people were given five
years to sell a 51% stake to indigenous people. An "indigenous Zimbabwean" had been defined
as "any person who before the 18 April 1980" -the official founding date of Zimbabwe -"was
disadvantaged by unfair discrimination on the grounds of his or her race".
235
The objective of
the law is to achieve a socially or economic theory by the involvement of indigenous
Zimbabweans in the economic activities of the country, who were denied access, so as to ensure
the equitable ownership of the nation's resources. Under the indigenization law, all business with
assets of more than $500, 00 would have to submit a form detailing the racial composition of
their shareholding to the government.236 A plan of five years on the implementation has to
accompany the document. The Act applies to any company, association, syndicate or partnership
of persons and it doesn’t matter whether the business is registered or not. The government would
then have to access how much of the company’s shareholding has to be ceded to Indigenous
Zimbabweans.
237
The Indigenization Minister will then keep a list of suitable candidates to
whom shares can be ceded. The Indigenization and Economic Empowerment regulations set out
a maximum jail sentence of five years for officials from companies that fail to cede majority
control to black Zimbabweans.238
Before going the provisions that the law seek to violate let start at domestic qualification of the
law. The Act is unconstitutional because according to Section 25 of the Constitution of the
Interparty Political Agreement, all the policies have to have sought approval of the cabinet and
parliament. Minister Morgan Tsvangirai is said to have not seen the law before its gazette.239 It
has also been apparent that he is not in support of the law. Furthermore the Bill of Rights
prevents compulsory acquisition of property except in special circumstances were it has to be
accompanied by compensation.
240
The Indigenization Act and Regulation give no mention of
compensation and the word cede is used which can be interpreted to mean handover freely. The
law also infringes upon the freedom of association in the constitution.
235
Zimbabwean President Robert Mugabe has denied that a controversial Zimbabwean law is to be shelved,
http://news.bbc.co.uk/2/hi/business/8619492.stm?utm_source=twitterfeed&utm_medium=twitter
236
ibid
237
ibid
238
ibid
239
Investor Arlet, www.newZimbabwe.com [accessed 09-03-2010]
240
ibid 59 BILATERAL INVESTMENT TREATIES ENCOURAGING FOREIGN DIRECT INVESTMENT: ZIMBABWE –SOUTH AFRICA BIPPA AS A CASE STUDY. Although many BIPPAs has been violated in the past as result of the Land reform policies one
should also take into consideration that the Global Agreement and the establishment of the
Government of National Unity have altered the political landscape of the country and this should
be able to ensure the rule of law. Bilateral investments treaties can be utilized by investors to
impose discipline on the host using tools like the national treatment provision. BIPPA can be
used to avoid expropriations that might arise from the indigenous law of Zimbabwe. The
proposed Indigenization and Economic Empowerment Act provides that foreign-owned
companies must transfer a majority shareholding in those companies to Zimbabwean nationals.
As a consequence, this Act poses a serious risk to foreign companies investing in Zimbabwe by
requiring that their local subsidiaries have at least 51 percent of their shares owned by
indigenous Zimbabweans, irrespective of when incorporated diluting existing shareholders'
interests to 49 percent. If the appropriation of land, owned by foreigners, is any guide, any
payment for the transfer of shares is likely to be delayed, probably indefinitely. Local law is
unlikely to provide relief for foreign investors. However, given the provisions of the signed
BIPPA investors from South Africa and third parties will be able to seek redress by use of
international law, directly against the Zimbabwe Government. The rights given by BIPPA are
enforceable by arbitration at the International Centre for Settlement of Investment Disputes
(ICSID). This means that investors do not have to be subjected to Zimbabwean law. The
provision of BIPPA overrides the application of domestic measures upon investors.
SA-Zimbabwe BIPPA Articles 3 (2), (3), and (4) “Each Party shall in its territory accord
to investments and returns of investors of the other Party treatment not less favorable
than that which it accords to investments and returns of its own investors or to
investments and returns of investors of any third State.” “Each Party shall in its territory
accord to investors of the other Party treatment not less favorable than that which it
accords to its own investors or to investors of any third State.” “The provisions to subArticles (2) and (3) shall not be construed so as to oblige one Party to extend to the
investors of the other Party the benefit of any treatment, preference or privilege resulting
from … “any law or other measure the purpose of which is to promote the achievement of
equality in its territory, or designed to protect or advance persons, or categories of
persons, disadvantaged by unfair discrimination in its territory
60 BILATERAL INVESTMENT TREATIES ENCOURAGING FOREIGN DIRECT INVESTMENT: ZIMBABWE –SOUTH AFRICA BIPPA AS A CASE STUDY. The afro-mentioned provision standard guarantee that foreign investors are not to be subjected
to any discrimination hence foreign investors can argue that the provisions of the proposed
Indigenous law discriminate against foreigners and local business .Zimbabwe can however try to
justify that the act falls under the exception of the above clause article 3(4). The sub-article was
put in to cater for the South African BBE because it is clear that it aims to correct the injustices
of the past. The preamble to the Broad-Based Black Empowerment Act (2003) stipulates that
one of the two objectives of the Act is to “promote the achievement of the constitutional right to
equality. Most of the recent provision South Africa has signed has included the provision. 241
Even the Southern African BBE which can be justified on reasonable grounds has been on the
spot light of BIT violation in relation to their initial BITs signed after apartheid had put South on
the spot light.242 A claim has already be been brought by the Italian investors in Marlin Holdings
Ltd, Marlin Corporation Ltd and Red Graniti SA (Pty) Ltd.243 The company controls around 80%
of South Africa’s natural stone exports. The claim has been brought under the South Africa-Italy
BIT which was signed on 9 June 1997 and came into force on 16 March 1999. Their request for
compulsory arbitration has been granted by the World Bank’s ICSID in Washington, DC on
request. They alleged that the MPRDA244 legislation, which came into force in 2004, violated the
right to fair and equitable treatment of Italian investors in South Africa. They also raised there
was violation on the right of protection against expropriation by effectively expropriating their
current mineral rights through the process of forcing them to convert their current rights to neworder rights.245 This conversion process is at the discretion of the Department of Mines and
Minerals, which must take into account whether the applicant has met its BEE targets as set out
by the Mining Sector BEE Charter.246 These requirements include appointing black managers, as
well as selling a 26% equity holding to BEE partners. The 26% ownership requirement by
241
DTI (Department of Trade and Industry) ‘Guidelines: Equity Equivalent Programme for multinationals’,
http://www.empowerdex.com/Portals/5/docs/dti%20BEE%20STRATEGY.pdf_. {accessed 04-05-2010]
242
Yazbek, Nicole(2010) 'Bilateral investment treaties: the foreclosure of domestic policy space', South African
Journal of International Affairs, 17: 1, 103 -120, http://dx.doi.org/10.1080/10220461003763874, [accessed 09-052010]
243
Ibid at 111
244
Minerals and Petroleum Resources Development Act of 2002.
245
Ibid.
246
Ibid. 61 BILATERAL INVESTMENT TREATIES ENCOURAGING FOREIGN DIRECT INVESTMENT: ZIMBABWE –SOUTH AFRICA BIPPA AS A CASE STUDY. historically disadvantaged South Africans is alleged to constitute a violation of investors’ rights
to receive fair and equitable treatment, because the Mining Charter discriminates against foreign
investors in favor of previously disadvantaged people and, as such, violates the ‘equitable
treatment requirements.247
This however cannot be purely justified in the Zimbabwean situation which has a history of
using domestic policy to justify expropriation and the law is being introduced after three decades
of independence. If the law surpasses, it will be difficult for Zimbabwe to escape arbitration
under the provision of indirect expropriation Locally the law had received much support as they
are divergence of views on the proposed law. The law which supposed to result in an urgent
transfer of shares is said to be aimed at enriching a few elite group in Zimbabwe.
"We fear that this could lead to a creation of new minority blacks who will just replace
the minority whites," Lovemore Matombo, the head of Zimbabwe's Congress of Trade
Unions, told AFP. And how does Mugabe's government determine who qualifies as an
"indigenous Zimbabwean" anyway? What about people of mixed race, naturalized
citizens, or citizens by marriage? The law says the category includes "any person who
before the 18th April 1980" -- when Zimbabwe was officially founded -- "was
disadvantaged by unfair discrimination on the grounds of his or her race." That means
the new law inverts the guidelines of the racist Rhodesian government, which as a
foundational principle discriminated against black and mixed-race people. 248
The establishment of international investment regimes is designed to provide the most stringent
and certain protection of foreign investment abroad by limiting governments into a predictable
regulatory framework far into the future.249 This has been described as the imposition of ‘the
discipline of the ‘‘rule of law’’ on state regulation.250 The argument that BIT has the effect of
limiting the policy space of the host is valid and states should always negotiate for treaties that
247
Ibid.
Anne Lowrey , Zimbabwe terrible business law, March, 2010,
http://blog.foreignpolicy.com/posts/2010/03/01/zimbabwes_terrible_new_business_law
249
Ibid.
250
Ibid.
248
62 BILATERAL INVESTMENT TREATIES ENCOURAGING FOREIGN DIRECT INVESTMENT: ZIMBABWE –SOUTH AFRICA BIPPA AS A CASE STUDY. leave that room.251 However in the case of Zimbabwe the limiting of sovereignty will help to
discipline the country investment policies. Zimbabwe needs foreign investment as a key
component to promote growth and reduce poverty caused by some of its domestic policies.
Bilateral investment treaties by reducing the space for unprincipled and arbitrary actions of the
host contribute to good governance which a necessary condition for the achievement of the
economic progress of the host. 252The treaties can work as tool to external checks and disciplines
to the domestic legal system. By subjecting to mechanisms of international dispute settlement
like ICSID states agree to the notion that domestic framework is being regulated by the decisions
of international authorities.253 The impact on domestic law that follows from the acceptance is
today perceived as a necessary consequence of an investor friendly climate as emphasized in the
preamble.254
Although no single set of guidelines exists to direct each state as it seeks to strike a balance in
these matters, the international trend is certainly to place higher emphasis on an investmentfriendly climate leading to economic growth rather than on legal and political concepts of
national sovereignty.
255
The common and most logical explanation given in the body of
literature dedicated to this topic is that investment treaties have been viewed and marketed as a
developmental tool because it is believed that they attract large inflows of foreign investment due
to the protection these agreements afford to foreigners.256 In other words, BITs act as a signaling
device for foreign investors.20 Such agreements facilitate potential investment, which host
governments view as vital for sustainable growth of their domestic economies. The classical
economic theory on foreign investment takes the form that foreign investment is wholly
beneficial to the host economy.
257
The fact that foreign capital is brought into the host state
ensure that domestic capital is available of public benefit. The foreign investors usually bring
with him technology and employment. Foreign direct investment (FDI) is one of the most
251
Ibid.
Ruldolf Dolzer supra note 63.
253
Ibid.
254
Ibid.
255
Ibid.
256
Ibid.
257
Sonarajah supra note 30. 252
63 BILATERAL INVESTMENT TREATIES ENCOURAGING FOREIGN DIRECT INVESTMENT: ZIMBABWE –SOUTH AFRICA BIPPA AS A CASE STUDY. important sources of investment funds and is seen as a primary means for increasing economic
growth, making them powerful players within the domestic political sector. Foreign investors
are, understandably, more willing to invest in countries with more stable property rights regimes.
The uncertainty inherent in high-risk economies increases makes to BITs remain substantively
and statistically significant regardless of which policy measures are implemented by the host
nation.258
There are more than 2,500 BITs259 which have been ratified worldwide and over 130 states have
ratified with ICSID Convention. Six BITs exist between Zimbabwe and third countries that have
come into force: China, Denmark, Germany, the Netherlands, Serbia and Montenegro, and
Switzerland. Most of these BITs including BIPPA contain a provision that protects a conduct
that is tantamount to expropriation. Investors from these countries can use them to pursue claims
by way of international arbitration. Third country investors can also utilize these treaties as
discussed .In being found in violation of the BIT provisions can result in arbitration costs which
supposed to deter the host from breaching any BIT. This leads to next possible impact of BIT
that is arbitration costs.
Arbitration repercussions
In the event of a dispute the cost of defending such claims can be substantial hence having
knowledge of the arbitration cost implications can have the effect of discipline upon the host.
The cost of defending for the state against on the investment laws has become expensive.260 On
average the cost of hiring three arbitrators has been estimated to amount to US$500.00261 and
fees for legal has also been very high.262 The Meticaland cooperation has been reported to have
258
Ibid.
United Nations Conference on Trade and development (UNCTAD), Bilateral Investment Treaties 1995-2006.
Trends in Investment Rule Making, United nations, New York and Geneva. P.1
260
LukePeterson
,Bilateral
Investment
Treaties
and
Development
Policy-Making,
http://www.iisd.org/pdf/2004/trade_bits.pdf [accessed 15-03-2010]
261
Gustavo Carvajal, presentation to workshop on investment, Americas Trade and Sustainable Development
Forum, November 18, 2003, Miami; Shihata and Parra 1999, put the average figure at US$220,000 in 1999
(excluding lawyer’s fees). In 2002, CSID’s daily fee payable to ICSID arbitrators was increased from $1,100 to
$2,000. On this schedule, the average cost would appear to rise to some $400,000.
http://www.worldbank.org/icsid/schedule/schedule.htm[accesssed09032010]
262
ibid 259
64 BILATERAL INVESTMENT TREATIES ENCOURAGING FOREIGN DIRECT INVESTMENT: ZIMBABWE –SOUTH AFRICA BIPPA AS A CASE STUDY. spend some US 4million on lawyers and arbitrators fee in NAFTA263. Another example is the
Czech Republic that is reported to have spent US 10million to defend against two major
arbitrations in relation to a large broadcasting enterprise.264 Adding to the money damages
awarded against Czech Republic who lost the matter amounted to more than a third of billion
dollars US which doubled the amount of the public sector deficit and necessitated an increase in
taxes and cost to the public spending.265 Both parties according UNCTAD 2005 had an average
costs plus arbitration of around $1.5 to $2.5 million. The financial implications to agreeing to
arbitration should be overlooked especially by a country like Zimbabwe struggling with its
economy.266
Reputational concerns In not abiding by the treaty the host has the disadvantage of tarnishing its image on the invest
arena. Clear violation of the treaties results in much reputational cost on host.267 Zimbabwe has
already suffered reputational costs will resulted in its economy crumbling down because
investors fled out of the country. The land reform resulted in many violations of property and of
bilateral investment treaties. BIPPA is however the first treaty Zimbabwe has signed in after the
subduing of the threats of land reform expropriating land under the unity government. This
reputation can however be nullified if Zimbabwe abide by BIPPA which it has recently ratified
to show its commitment.
By signing a BIT Zimbabwe can regain a good reputation as good investment destination. BIT
gives a reputational advantage over others who will also be competing for inflow of capital. Lack
of credibility on the host is also diffused by signing of the agreement. It is argued that BIT where
the host is unreliable as signals the willingness to abide by international obligation. The aim will
be to compete among potential hosts, to reduce risk and to enhance profitability of investments.
In countries were the institutions are inherently credible BITs adds no value as investors are do
263
Metalclad Corporation v. the United Mexican States, ICSID Case No. ARB(AF)/97/1, Award, 30 August 2000;
Review by the British Columbia Supreme Court (2001 BCSC 664), 2 May 2001; Supplementary Reasons for BCSC
Decision, 31 October 2001.
264
ibid
265
ibid
266
ibid
267
Elkins, Zachary, Guzman, Andrew T, & Simmons, Beth. (2006). Competing for Capital: The Diffusion of
Bilateral Investment Treaties, 1960-2000. UC Berkeley: Berkeley Program in Law and Economics. Retrieved from:
http://escholarship.org/uc/item/0bp87871 see generally.
65 BILATERAL INVESTMENT TREATIES ENCOURAGING FOREIGN DIRECT INVESTMENT: ZIMBABWE –SOUTH AFRICA BIPPA AS A CASE STUDY. not need a treaty to be convinced to invest. It has been found that BIT is of much value to state
with the reputation of being corrupt and lacking law and order. Although they can be arguments
against this it has been indicated that on the findings of Late 1980s that BIT has had obvious
payoffs to the host nations. There was an indication of BIT in force being associated with an
extra 0, 5 percent GDP percent in investment.
66 BILATERAL INVESTMENT TREATIES ENCOURAGING FOREIGN DIRECT INVESTMENT: ZIMBABWE –SOUTH AFRICA BIPPA AS A CASE STUDY. CHAPTER FIVE
Conclusions
Zimbabwe is a country that is endowed with many natural resources. An estimated 35 minerals
are produced in Zimbabwe, the main ones being coal, chromium ore, asbestos, gold, nickel,
copper, iron ore, vanadium, lithium, tin and platinum group metals. The country also boasts of
the largest reserves of coal bed methane gas in the sub-Saharan Africa. At the current extraction
rate, Zimbabwe’s coal will last for 5500 years with the country also having the second largest
platinum discoveries in the world. In coal bed methane, the country has potential to generate
electricity from its gas fields.268 Natural resources of the country can allure investors to the host
despite the political risk that might be associated with the host, this has been seen in most oil
exporting countries. On the other hand an investor who invest in a country where there is a BIT
in place is in much better position that the one where there no investment treaty to ensure
protection of investments.269
Political risk can be a major hindrance on investors reaping their benefits especially where there
is no recourse available. Investors need to be assured that their property is protected in a foreign
land before they can decide to invest. Political risk can make investors flee away from a country
resulting in serious economic implication upon the host. Zimbabwe’s domestic laws has resulted
in many investors leaving the country and the bilateral investment and protection agreement was
signed as assurance that investors can invest in Zimbabwe and not be limited by national law
rather their needs will be addressed at an international level. The clear outlined substantive and
procedural rules have the effect of encouraging investors to the host. Although they are many
methods that can be used to reduce risk BIT has been seen as another tool.270 BIT seeks to
improve the domestic institutions because of it signaling characteristic. The commitment effect is
also fulfilled as through a binding arbitration states known to violate investors rights. These rules
seek to discipline the host policies infringement upon the investor’s rights.
268
Ministry of industry and international trade , Investing in ZImbabwe 2007 brochure,
www.miit.gov.zw/brochure/2007_brochure.pdf [accessed 09-04-2010]
269
Paul E. Comeaux,N. Stephan Kinsella,Copy right © 1994 by the New York Law School Journal of International
and Comparative Law.
270
ibid 67 BILATERAL INVESTMENT TREATIES ENCOURAGING FOREIGN DIRECT INVESTMENT: ZIMBABWE –SOUTH AFRICA BIPPA AS A CASE STUDY. In has been shown that investors can invest in Zimbabwe under the shield of the recently signed
bilateral investment promotion and protection agreement .This has been the first under the Unity
government which more weight than the previous ones which were violated during the Land
reform. The fact that the new government seek to rebuild the economy can make the government
abide by BIPPA. To show that they are now not only ready to welcome investors but to commit
to international norms Zimbabwe has already ratified the agreement. A ratified treaty binds the
government to abide by what they would have signed to.
On the other hand these agreements come with their own cost effects upon the host nation. These
have been summed up as sovereignty, arbitration and reputational costs. States trade sovereignty
for FDI. The domestic policies have to be in line with the agreement because evidence to the
contrary can be detrimental to the host. Arbitration costs has recently have raised eyes of many
host nations because of the huge amounts are now being awarded to investors hence states have
to think twice before they violate the rights of investors. Reputational costs has been said to
emanate from the state’s failure to abide by the treaty. This can result in investors leaving the
host and deterring new investors. These three features sound all negative but it has been argued
that they have a disciplinary effect upon Zimbabwe resulting in an increase in FDI.
Recommendations
 Zimbabwe needs to abide by BIPPA, signing the agreement has shown that Zimbabwe is
willing to abide it. The South African government needs to ratify the agreement in order
to ensure more protection upon its nations. This is because a ratified treaty is binding
upon the states. There is however need for Zimbabwe to review some of its policies
especially the Indigenization law. This is because failure to do so might result in
investors leaving.

There is need to create more policy space in these agreements.271 Even though there an
argument above, of the provisions of BIPPA being disciplinary upon the host it should be
271
Yazbek, Nicole(2010) 'Bilateral investment treaties: the foreclosure of domestic policy space', South African
Journal of International Affairs, 17: 1, 103 — 120, http://dx.doi.org/10.1080/10220461003763874 [accessed 09-052010]
68 BILATERAL INVESTMENT TREATIES ENCOURAGING FOREIGN DIRECT INVESTMENT: ZIMBABWE –SOUTH AFRICA BIPPA AS A CASE STUDY. approached with cautions as the very same agreements will cause problems for the
government. These treaties are seen to reach beyond domestic borders into sensitive
regulatory areas and economic sectors; there is a growing need for host governments who
sign them to ensure that they provide ‘adequate safeguards for the exercise of legitimate
government activity.272

Developmental concerns273- the fact that bilateral investment treaties seek to encourage
foreign direct invest does not necessary mean that it will result in development in the
current, the need to ensure development should be apparent in the treaties. BIPPA
provisions give unlimited power of the repatriation of funds. There is need to create some
exceptions to BIPPAs hence they should have been an expectation to balance of
payments. The developmental goal should be made apparent in investment treaties. An
example being preferential treatment used as a weapon to encourage development.

Performance requirements274 are obligations imposed upon an investor by host state’s public
authorities. They are typically part of the pre-establishment negotiations conducted between a
prospective investor and the relevant home state authorities. A wide range of performance
requirements have been identified and fall into six broad categories: export performance;
joint venture and equity ownership; research and development; technology transfer;
employment and training; and other requirements such as local content requirements or the
provision of surety in the form of bonds or otherwise. Performance requirements require an
investor to give undertakings to meet certain criteria. Consequently performance
requirements are widely seen as imposing an economic burden or otherwise decreasing the
economic efficiency of an investment.
There is also the need to look at the new generation investment agreements, an example being s
the new model BITs of the United States and Canada. According to UNCTAD (2007)275 there
are five main features which include;
272
Peterson LE, South Africa’s Bilateral Investment Treaties: Implications for Development and Human Rights,
Dialogue on Globalisation conference report. Berlin: Friedrich-Ebert-Stiftung, 26, 2006, p. 3.
273
Peterson LE, ‘Bilateral investment treaties and development policy making’, International Institute for
Sustainable development, 2004, p. 4, http://www.iisd.org/pdf/2004/trade_bits.pdf_ [accessed 20-05-2010]
274
DTI, Government Policy Paper supra
275
See as stipulated and further explanation. 69 BILATERAL INVESTMENT TREATIES ENCOURAGING FOREIGN DIRECT INVESTMENT: ZIMBABWE –SOUTH AFRICA BIPPA AS A CASE STUDY. • First, some recent IIAs have deviated from the traditional open-ended, asset-based definition of
investment. Instead, they have attempted to strike a balance between maintaining a
comprehensive definition of investment and yet not covering assets that are not intended by the
parties to be covered investments.
• Second, the wording of various substantive treaty obligations has been revised. Learning from
the technical intricacies faced in the implementation of NAFTA’s Chapter 11 and other
agreements, new IIAs clarify the meaning of provisions dealing with absolute standards of
protection, in particular the international minimum standard of treatment in accordance with
international law, and indirect expropriation.
• Third, these IIAs address a broader range of issues – not only specific economic aspects like
investment in financial services, but also other kinds of issues where more room for host country
regulation is sought. The protection of health, safety, the environment and the promotion of
internationally recognized labor rights are areas where new IIAs include specific language aimed
at making it clear that the investment promotion and liberalization objectives of IIAs must not be
pursued at the expense of these other key public policy goals.
• Fourth, recent IIAs include transparency provisions that represent an important qualitative
innovation compared with previous IIAs. Moving from a trend towards conceiving transparency
as an obligation to exchange information between countries, these IIAs tend to establish
transparency also as an obligation with respect to the investor. Furthermore, transparency
obligations are no longer exclusively geared towards fostering exchange of information, but also
pertain to transparency in the domestic process of rule-making, aiming to enable interested
investors to participate in it.
• Fifth, new IIAs contain significant innovations regarding ISDS procedures. Greater
transparency in arbitral proceedings, including open hearings, publication of related legal
documents and the possibility for representatives of civil society to submit amicus curiae briefs
to arbitral tribunals, is foreseen. In addition, other very detailed provisions on ISDS are included
70 BILATERAL INVESTMENT TREATIES ENCOURAGING FOREIGN DIRECT INVESTMENT: ZIMBABWE –SOUTH AFRICA BIPPA AS A CASE STUDY. in order to provide for more legally oriented, predictable and orderly conduct at the different
stages of the ISDS process.
71 BILATERAL INVESTMENT TREATIES ENCOURAGING FOREIGN DIRECT INVESTMENT: ZIMBABWE –SOUTH AFRICA BIPPA AS A CASE STUDY. Bibliography
Books
Sonarajah M (2004) The International Law on Foreign Investment Cambridge: Cambridge
University Press.
UNCTAD (1998) Bilateral Investment Treaties in the Mid-1990s New York: United Nations
Dolzer R & Margete S (1995) Bilateral Investment Treaties Martinus Nijhoff
Publishers
Case law
Bernardus Henricus Funnekotter & Others v Republic of Zimbabwe ICSID Case No. ARB/05/6)
Campbell (Pvt) Ltd & Others v Zimbabwe),5 Mike Campbell (Pvt) Ltd & Others v The Republic
of Zimbabwe, SADC (T) Case No. 2/2007
CMS Gas Transmission Company v The Republic of Argentina ICSID Case No ARB/01/8.
AAPL v Sri Lanka.
Columbia Del Desarrollode Santa Elena SA v Costa Rica ICISID Case NO ARB/96/1
Cze republic v CME Czech Republic BV( Svea Court of Appeals 15 May 2003)
Maffezini ICISID Case No. ARB/97/7
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77 

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