Reconceptualizing the Right to Regulate in Investment Agreements: Reflections from the South African and Brazilian experiences
Fabio Morosini
I. Introduction
The international investment regime is under attack and reform proposals are receiving increased attention in international negotiations and in the literature. Existing debates have put a great deal of attention on dispute settlement alternatives, all the while leaving out other equally contested features of the regime, such as the need for rebalancing investors and States’ rights and
obligations.1 This article intends to shift the discussion to one of such features, by focusing on the countries’ Right to Regulate [RTR]. RTR in international investment law can be defined as the policy space available in investment agreements for countries to regulate in the public interest. Because investment agreements were created to limit certain aspects of countries’ RTR,
Fabio Morosini is an Associate Professor of Law at the Federal University of Rio Grande do Sul and a research
fellow at the National Council of Scientific and Technological Development (CNPq). The author is thankful to Malebakeng Forere, Michelle Sanchez-Badin, David Trubek, Alvaro Santos, and Gregory Shaffer for comments on previous drafts of this paper, and to Lesedi Malatji and Laura Guimaraes for excellent research assistance. The usual caveat applies.
1 Fabio Morosini & Michelle Ratton Sanchez Badin (eds.), Reconceptualizing International Investment Law from
the first wave of agreements inhibited regulatory experimentation harmful to foreign investor’s rights. Mounting domestic criticism and fear of challenges before arbitral tribunals against
developed countries made them carve out some policy space within investment agreements under the rubric of RTR. This development in investment law has mostly benefited countries wanting more policy space in areas such as environment, health and safety. Investment tribunals have, by and large, accompanied these changes. Within this broad debate, other policy goals, central to countries in the Global South, have not received sufficient attention.
From the perspective of countries in the Global South, an honest reform in order to promote greater policy space should be able to accommodate policy experimentation in a variety of areas. In this paper, I propose to enlarge the notion of RTR in investment agreements to provide more flexibility for countries, an aspect that has been largely overlooked in the processes of reforming investment agreements and accompanying literature. A RTR approach to take account of other needs should allow countries to incorporate policy areas as diverse as redistributive justice and industrial policies. I develop my idea by focusing on the recent experiences of South Africa and Brazil in relation to RTR. While South Africa decided to terminate their BITs and resort to domestic laws and institutions, Brazil has decided to initiate an investment treaty program that moves away from standard investment treaty language that have the protection of foreign investment as the primary, or sole, subject matter. These two cases suggest that: 1) there are alternative paths to match investors’ rights with countries’ RTR; 2) these alternatives face constant pressure to conform with the neoliberal-embedded Bilateral Investment Treaty [BIT] program from internal and/or external sources.
II. Investment agreements and policy autonomy in South Africa and Brazil
A. South Africa: Rebalancing black economic empowerment and investors’ rights
South Africa is currently the most unequal country in the world.2 Even if the investment regime is not entirely to blame for, it certainly plays a part. The difficult balance between correcting racial inequalities and preserving property rights (domestic and foreign) has been the major challenge ahead of the South African society since the end of the apartheid rule in 1994. It has proven to be a difficult balance to strike, given that protection of property rights is a central feature of the African National Congress’ [ANC] commitment with the global capitalist system after the apartheid. In this context, conflicts with foreign investors’ rights is only but one element of a much broader narrative, whereby the standard BIT formulation represents the interests of the global capital.
South Africa is highly reliant on foreign capital.3 As part of its strategy to attract FDI, the
country rushed into BITs with capital-exporting countries in order to hint its commitment to
2 Data obtained from two different measurement systems: 1) the Gini index estimates from the World Bank, which
looks at the distribution of a nation’s income or wealth to measure financial inequality; and 2) The Palma ratio, an alternative to the Gini index that focuses on the differences between those in the top and bottom income brackets. The Guardian, Inequality Index 2017, < https://www.theguardian.com/inequality/datablog/2017/apr/26/inequality-index-where-are-the-worlds-most-unequal-countries>.
3 < https://www.imf.org/external/pubs/ft/scr/2016/cr16218.pdf >. See also <
global capitalism. The standard BIT formulation allowed very little policy space for host
countries,4 and certainly no room for the promotion of racially-based policies potentially harmful
to investors’ rights. Curiously, the process of adhering to BITs occurred simultaneously with the process of drafting a new and transformative constitution, which acknowledged the need to correct racial inequalities as central to South Africa’s development. Eager to join the global capitalist system after years of isolation and desperately needing capital, the country did not fully evaluate possible negative externalities of BITs on South Africa’s policy space until much later, when a claim was brought against the state, opening a Pandora box for similarly motivated disputes. In the Foresti case, private investors challenged South Africa’s Mineral and Petroleum Development Act [MPDA] and Mining Charter for allegedly expropriating investment while adjusting to the demands of the Black Economic Empowerment Act, a policy designed to transfer control of the economy from white South Africans to black ones. Attempting to encourage greater ownership of mining industry assets by historically disadvantaged South Africans [HDSA], the Mining Charter required mining companies to achieve 26% HDSA
gross fixed capital formation, a key requirement for future growth sustainment, has become increasingly reliant on international capital inflows).
4 The traditional BIT formulation is framed around one main goal: protecting foreign investors. Under this approach,
treaties usually include broad definitions of investors and investment; expansive standards of treatment to investors, such as most-favored-nation, national treatment, fair and equitable treatment, umbrella clauses and full protection and security; stringent rules on expropriation (both direct and indirect) and compensation; free transfer of funds and Investor-State Dispute Settlement.
ownership of mining assets and publish employment equity plans directed towards achieving a baseline 40% HDSA participation in management. The parties ended up reaching an agreement whereby investors would be deemed to have complied with the Mining Charter by making a 21% beneficiation offset and providing a 5% employee ownership program for employees of the investors. In other words, the government of South Africa fell short of fully meeting the country’s constitutional values of correcting the legacies of the apartheid rule.
This case has major domestic and systemic repercussions. Domestically, it tells South Africans that, despite constitutional provisions, corrections of past legacies of the apartheid rule will simply not happen, or at least not completely, due to, inter alia, previous investment
commitments. Systemically, it demonstrates that whatever room exists for countries to exercise their regulatory power, BITs may deter their policy space even in relation to core constitutional values.
South Africa reacts! In response to Foresti and fear of similar claims, the country has been undergoing a process of restructuring its investment regulation to align it with South Africa’s Constitution and post-apartheid promises, carving out policy autonomy to promote affirmative action programs. In 2009, South Africa issued a position paper to critically evaluate its
investment policies, suggesting rebalancing investor rights and regulatory space, which served as the basis for the 2015 South African Protection of Investment Act.
The Act challenges mainstream formulations of investment regulation designed around the goal of protecting foreign investors, sets out the government’s intention of not renewing the so-called first generation BITs and to restrict the country from entering into new BITs, unless there are compelling economic and political reasons for doing so. The Act embraces substantive changes,
including limiting the definition of investment/investor, exclusion of fair and equitable treatment to foreign investors, and replaces Investor-State Dispute Settlement [ISDS] for domestic courts. Most importantly, the Act subjects property rights to the Constitution of the Republic. The Constitution of South Africa guarantees property rights but, like any other constitutional right, subjected to public purpose limitations. Specifically, section 25(2) of the Constitution allows expropriation of property for public purpose subject to payment of equitable compensation. Another important aspect for the purposes of this paper is that of the Act brings the obligation to take measures to protect or advance historically disadvantaged persons to the core of the Act: in the preamble, in its right to regulate provision and as an exception to the national treatment obligation.
South Africa’s intention to carve out policy autonomy based on black economic empowerment faces external and internal challenges. The decision of not renewing its investment agreements was a source of great concern to foreign investors, because it was read as South Africa’s officially denouncing the treaties. For a country that is heavily reliant on foreign capital, these concerns cannot be easily dismissed. Secondly, the adoption of a new investment Act that
incorporates flexibilities in order to correct racial inequalities makes investors very apprehensive as to its actual impacts.
At the time of this writing, yet new challenges are underway. As an additional feature of the Black Economic Empowerment policy, there is pending legislation and heated public debate on the possibility of land expropriation without compensation. This brings an additional element of tension to the debate in South Africa. While previous measures adopted by the government have centered around violations of BIT commitments, these new measures attempting to expropriate
land without compensation also appears to conflict with Section 25 of the Constitution, which requires expropriation to be followed by compensation.
The success of South Africa’s alternative in rebalancing Black Economic Empowerment with investors’ rights is uncertain. It will depend on at least two elements: 1) how foreign investors respond to these regulatory changes, and 2) if the South African government is able to uphold the Black Economic Empowerment policy in light of internal and external pressures. Despite these uncertainties at home, debates in South Africa are already influencing the Southern African Development Community [SADC], an inter-governmental organization composed of 15 Southern African states. South Africa was actively engaged in designing the 2012 SADC BIT Template, which, among others, contains a development dimension in its right to regulate provision and another specific provision on the rights of a state party to pursue development goals, which includes taking “measures necessary to address historically based economic disparities suffered by identifiable ethnic or cultural groups due to discriminatory or oppressive measures against such groups.”5
B. Brazil: Carving policy space in the shadow of BITs
Brazil’s engagement with investment policies have varied from resisting standard BITs in the 1990s to developing a new model investment agreement in 2013, replacing the paradigm of investment protection by one based on investment cooperation and facilitation. In both
5 Southern African Development Community [SADC]. (2012, July). SADC model bilateral investment treaty
template with commentary, Article 21. Gaborone: SADC. Retrieved from
occasions, the government was concerned with shielding Brazil’s regulatory space from investment commitments.
In the 1990s, during the heydays of neoliberalism, Brazil resisted joining any investment
agreement, although it signed 14 such agreements never to be ratified. During this period, Brazil was perceived and perceived itself not as an exporter but as a destination of FDI, which helps to explain resistance to investment agreements. These agreements, mostly with developed
economies, replicated the same investor-protective BIT standards to Brazil. At the time, there were resistance to these agreements from different fronts of the Brazilian society, but mostly from then-opposition party, the Worker’s Party. Two particular clauses were seen as
problematic. First, the method of compensation provided in these agreements conflicted with the Brazilian Constitution. Second, the government was adamant to reject ISDS. It refused to accept the idea that private arbitrators could decide matters of Brazilian public law. At the time, it echoed much of the same reactions that we now see emerging in the United States and Europe against ISDS: bypassing local administrative bodies and courts, and democratic accountability. After much resistance, by the very end of Fernando Henrique Cardoso’s neoliberal(ish)
government, these agreements were discontinued. From an economic point of view, the decision not to ratify these agreements did not prevent Brazil from remaining as one of the top FDI recipients, challenging the neoliberal narrative that BITs are necessary to attract foreign investment.
In 2003 Lula da Silva was elected president and awoke a dormant developmental state,
resuscitating Brazil’s industrial policy with important spillover effects on investments.6 Mostly
through the Brazilian National Development Bank [BNDES] financing, the government targeted a group of “national champions” and fostered the emergence of a new constituency in the
country: the Brazilian multinational corporations.7 Such a policy had direct effects on the
activities of these corporations in foreign markets. Between 2005 and 2010, Brazil’s FDI outflow was multiplied by almost 9 times.8
Although debatable in the literature, it has been argued that BNDES financing was a relevant factor to foster Brazilian investment outflows during that period. This policy could have been curtailed and negatively affected Brazilian multinationals if: 1) Brazil was part of standard BITs, and 2) Competing foreign investors with local subsidiaries had BNDES’ funding denied. In this case, foreign investors could challenge Brazil’s measures under the national treatment clause and other standard of treatment obligations. In the worst case scenario, if Brazil was found in
violation of the BITs, compensation would ensue and, most importantly, Brazil’s development
6 David M. Trubek, Helena Alviar Garcia, Diogo R. Coutinho & Alvaro Santos, Law and the New Developmental
State: The Brazilian experience in Latin American context (Cambridge: Cambridge University Press, 2013).
7 Amann, E. (2009). Technology, public policy and the emergence of Brazilian multinationals. In: L. Brainard & L.
Martinez-Diaz (Eds.) Brazil as an economic superpower? Understanding Brazil´s changing role in the global
economy. Washington, D.C.: Brookings Institution, pp. 187–220.
8 United Nations Conference on Trade and Development (UNCTAD). (2018). UNCTADstat. Retrieved
strategy could be compromised, if not discontinued. Outside this large government-financing program, Brazil could equally have had its right to regulate challenged by foreign investors in matters as diverse as fiscal policy to water supply, as experienced by some neighboring countries. It is, however, beyond the scope of this paper to screen Brazil’s policies in light of standard BIT provisions. Even if it could be argued that Brazilian investors could have also benefited from the protections BITs when investing abroad - a positive externality of BITs for Brazil, it should be noted that in the 1990s, when BITs were being considered by Brazil, Brazilian outward FDI was not really significant and was concentrated in a few players, who employed other legal arrangements, such as contracts and incorporating in foreign jurisdictions in order to benefit from their laws, including BITs.
Following its vein of experimentation, in 2013, Brazil finalized a new model investment
agreement, substituting the protection of investment narrative for a new one based on investment cooperation and facilitation. Since March 2015, Brazil has signed nine ACFIs with other
developing countries (Angola, Chile, Colombia, Ethiopia, Malawi, Mexico, Mozambique, Peru and Suriname) as well as the intra-MERCOSUR Investment Protocol. In addition, investment facilitation agreements, the kind supported by Brazil, have been discussed in multilateral fora, such as the G20 and the World Trade Organization (WTO), with the open support of China.9
9 Berger, A. (2018, April 23). What’s next for investment facilitation?, Columbia FDI Perspectives, 224. Retrieved
The presence of Brazilian multinational enterprises [MNEs] in the Global South, especially Latin America and Africa, pressured the government to create an investment agreement that responded to new demands of Brazil’s private sector, especially the creation of communication channels inside the countries where Brazilian MNEs invest in order to serve as a dispute prevention mechanism. Unlike other investment agreements currently under consideration that focus on adjudication, the Brazilian model was designed to encourage more diplomacy through well-defined institutional channels. Another important factor that contributed to the development of a new investment policy in Brazil was the country’s bureaucracy that kept the topic in their agenda since 2003. Debates concerning an alternative type of investment agreement took place in
CAMEX, a permanent advisory body of the presidency in matters related to the formulation, adoption, implementation and coordination of foreign policies. But it was only in 2013, under the leadership of the Ministry of Development, Industry and Commerce [MDIC] Foreign Trade Secretariat [SECEX], that a final template of the ACFI was approved by CAMEX and bilateral negotiations started.10
The new model investment agreement moves away from the standard investor-protective treaty, by limiting the definition of investment/investor, excluding indirect expropriation and key standards of treatment clauses, such as fair and equitable treatment, and ruling out ISDS. The approach based on investment cooperation and facilitation puts emphasis on: 1) creating
10 Fabio Morosini & Michelle Ratton Sanchez Badin, Navigating between Resistance and Conformity with the
International Investment Regime: The Brazilian Agreement on Cooperation and Facilitation of Investments (ACFIs),
in Fabio Morosini & Michelle Ratton Sanchez Badin (eds.), Reconceptualizing International Investment Law from
mechanisms, such as ombudspersons and joint committees in order to monitor investment relations and prevent disputes from happening; and 2) creating open-ended/framework
agreements that can be adapted over time to accommodate the parties’ needs through thematic work programs, a living part of every ACFI and an important feature for policy experimentation.
The search for policy autonomy in the shadow of investment agreements and through alternative regulatory frameworks is on hold in post-impeachment Brazil. The administration has been taking specific measures doing away or threatening many features of Brazil’s developmental state.11 In his inauguration speech as Brazil’s Foreign Affairs Minister right after the
impeachment, Jose Serra set the tone of the country’s foreign policy, even if he was swiftly substituted by another like-minded politician. Instead of what he termed as ideological alliances, Brazil should reengage with countries like the US and the European Union. Implicit in his speech is the idea of abandonment of a resistance and experimentation project, and adoption of
strategies that reinforce domination of hegemonic globalization.12 At a more practical level, Brazil has aggressively confronted with a neoliberal agenda for reforms led by the Ministry of Finance that includes: 1) the approval of a 20-year budgetary cut affecting investment in education and health; 2) Curtailing labor rights; 3) Attempts to approve pension funds reform;
11 André Singer, The failure of the developmentalist experiment in three acts (São Paulo: Critical Policy Studies,
2017).
12 David Schneiderman, Resisting Economic Globalization: Critical Theory and International Investment Law.
and 4) requesting accession to the OECD. Under this new agenda, Brazil’s investment policies, seen by some as a legacy of the previous administration, risk losing traction.
III. Concluding thoughts
South Africa and Brazil’s experimentation with investment law to promote policy autonomy in different areas faces challenges. Externally, their practices go against a mainstream regime based on more than 3,000 agreements designed in the shadow of neoliberalism. While there has
recently been signs that BITs may allow some flexibilities, as in the case of certain environmental and health policies, it is less likely that it will welcome formulations that
challenges the rationale of investment protection, such as the ones promoted by South Africa and Brasil.
In addition, both South Africa and Brazil face domestic challenges to implement their investment policies. After President Zuma’s resignation, it is now under President Ramaphosa’s
responsibility to strike a balance between addressing the country’s historical racial inequalities— the DNA of the African National Congress—and the global capitalist system in which BITs are embedded. Brazil’s experimentation with heterodox policies, including on investment, to further an alternative development model is less clear in the wake of a neoliberal-driven government. In such a context, the future of Brazil’s investment policy will remain uncertain until a newly elected government comes into power in 2019.
Despite these challenges, the experiences of South Africa and Brazil demonstrate that there is room for heterodoxy and genuine reimagination of the investment regime, where the interests of investors are matched with the core values of states, such as those concerning redistributive justice or industrial policy objectives. In order to achieve a balance on potentially conflicting
interests, countries need to be creative and design more flexible alternatives that go beyond safeguarding policy space on environment, health and safety, and include other national
economic priorities. If more flexibility in relation to RTR is not acknowledged and addressed by the investment regime at large, investment treaties and tribunals will only serve to perpetuate global inequalities under the rule of law.
