Picture: THINKSTOCK
Picture: THINKSTOCK

SOUTH Africa last week cancelled its bilateral investment treaty with Germany, one of its most important trading partners, amid protests by German businesses here.

The move comes as part of South Africa’s stated intention to reshape its investment policy framework, ending bilateral treaties with individual countries.

The German treaty is the fourth one with a member of the European Union (EU) to be cancelled, but it is by far the biggest and most significant.

Trade and Industry Minister Rob Davies signalled more than a year ago that the investment treaties would be replaced by general legislation.

While the cancellation of the German treaty was not a surprise, there was disappointment in EU trade circles. This was because there had been a tacit understanding that no further treaties would be cancelled until the law to replace them had been aired.

The Cabinet last week approved the Promotion and Protection of Investment Bill but it has not yet been published.

Trade and industry spokesman Sidwell Medupe said the department planned a full briefing on the bill next Monday.

The cancellation of the bilateral investment treaties — including those with Luxembourg, Spain and Belgium — has caused jitters among investors and rating agencies. This is on fears that investor rights might not be as strongly protected in the future.

The South Africa-German Chamber of Commerce and Industry, representing about 600 companies, warned the move "could have a negative impact on general investor confidence" and that its members were concerned.

While existing investments will remain protected by the treaties for 20 years, new investors are in the interim, unsure of the terms of their property and legal rights.

"Bilateral investment treaties are of particular importance to small and medium-sized companies, who are the majority of German companies in South Africa," said chamber director Matthias Boddenberg. " The psychological effect on prospective investors should not be underestimated."

The chamber said trade volumes between Germany and South Africa are among the highest of all the latter’s bilateral relations, amounting to about R180bn. Further, Germany remains among the largest investors in South Africa with investments of more than R81bn.

Peter Leon, partner at law firm Webber Wentzel, said while the cancellation of the German treaty did not come as a shock, it was significant because of that country’s importance to South Africa.

The Department of Trade and Industry has indicated that investors could face significant changes to their rights. The bill could contain "a model" bilateral investment treaty that would apply to all relations.

"Nobody has seen the new bill and nobody knows what is in it," Mr Leon said. "Even if published soon, it could be a year before it becomes law.

"The model contained in the bill will have to be negotiated with the EU and agreed. This could take some time."

The model suggested is also a cause for anxiety, as it would diminish the right to compensation in the case of expropriation and limit investors’ recourse to international arbitration.

"The model (bilateral investment treaty) that the (Department of Trade and Industry) has suggested is retrogressive," Mr Leon said. "Contrary to international best practice, it removes investors’ recourse to international arbitration, which means that legal proceedings will have to proceed through the South African courts."