Business Day | 6 May 2020
Africa must not let disputes with foreign investors undermine its Covid-19 response
In 2012 SA embarked on bold reforms to terminate its old-generation investment treaties, with their infamous investor-state dispute settlement (ISDS) mechanisms. The move came after years of grappling with excessive arbitral awards, lack of transparency in arbitration proceedings, and constrained policy space for its development objectives.
Today SA continues to push for reform of the system, underscoring the detrimental effect on public budgets, regulations in the public interest and the rule of law. These problems are due, in part, to foreign investors using the process to bypass domestic institutions and laws. While the need for reform remains, it has become urgent in 2020 in light of the novel coronavirus pandemic, given that foreign investors are expected to challenge some of the emergency measures taken in response.
The government has responded to the Covid-19 threat by enacting a full lockdown that has caused severe disruption to the economy. Unfortunately, in crises like these, investor-state arbitrations are often not far behind. After the 2007-2008 global financial crisis, there was a rapid spike in ISDS claims for measures taken by governments to address the financial fallout. Closer to home, Egypt lost the equivalent of 12% of its national budget for health and education to just one damages award, which cost the government more than $2bn following measures taken during the Arab Spring.
Vulture funds and third-party funders tend to finance investors to bring forth ISDS claims in the hope of profiting from hefty arbitral awards. An ISDS claim could arise where an aggrieved investor seeks compensation before three arbitrators, often private lawyers, for the alleged breach of rights under an international investment agreement. These claims range from direct and indirect expropriation of their rights — where governments have taken measures affecting their businesses without compensating them adequately — to the unfair treatment of foreign investors vis-à-vis domestic investors.
However, the ISDS system is riddled with inconsistencies, lack of transparency and costs. It is therefore essential that African states take urgent precautionary measures to ward off this unnecessary burden. One such step could be calling for suspension of ISDS on all Covid-19 related measures on multilateral platforms.
SA has already seen how ISDS can be used to limit the government’s policy space, especially in times of crisis. The BEE programme is an example of a crucial development agenda meant to address some of the economic damage and entrenched inequalities wrought by apartheid. The BEE programme is embedded in key laws, such as the 2004 Mineral & Petroleum Resources Development Act (MPRDA). Yet it soon faced legal challenges, with Italian investors initiating an ISDS claim for the policy action, alleging it affected their mining rights.
Other African states have also been proactive in addressing the risk from ISDS given their own experiences. In 2018 Tanzania undertook reforms to limit the use of international arbitration to resolve disputes under public-private partnership contracts in its Public-Private Partnership Act, and more broadly in the natural resources sector. Other countries in the region are following suit, reforming their model investment treaties due to the risks posed by these agreements.
Countries will continue to grapple with the direct and indirect effects of Covid-19 for months and years to come. The UN Economic Commission for Africa estimates that 27-million people could be pushed into extreme poverty in the region, while several countries will default on debt payments. African finance ministers have already called for the urgent release of $100bn, of which $44bn would go towards debt relief for all African countries. The International Monetary Fund (IMF) and Group of 20 (G20) have since pledged support and the suspension of debt repayments.
In light of these pressing challenges, African states must be prepared for the imminent threat of ISDS claims to undermine these emergency measures and responses. Examples of this risk are already emerging in other parts of the world. The Peruvian government was recently cautioned against measures it intended to take in its efforts to ease the movement of essential goods and workers during the Covid-19 pandemic. The government aimed to waive toll fees, but media reports indicate that concessionaires could bring ISDS claims over unilateral changes to their contracts.
African states should urgently call for the suspension of investor-state arbitration for all Covid-19-related measures, and urge others to do the same. State resources and global financial support should be focused on public health systems, restoring economic health and managing related crises, not defending perverse claims made in times of a global pandemic.
• Maina is law adviser: agriculture & investment, with the International Institute for Sustainable Development.