Bilateral Investment Treaties (BITs) are a set of rules that govern private foreign investments from one country to another. The main purpose of the BITs is to provide additional comfort to foreign investors to stimulate the inflow of Foreign Direct Investment (FDI) in a certain country.
In 1959 the first BIT, in its current format, was signed between West Germany and Pakistan. Initially, BITs were ratified between capital exporting countries (developed countries) and capital importing countries (developing countries). The developed country's interest in the BIT was to ensure legal certainty for its companies' investments beyond what was offered by the domestic laws of the developing country, whose motivation in participating in the BIT was to use the agreement as a means of attracting more foreign investors.
Mozambique, as a developing country, also executed several BITs in the 1990s, after transitioning from the ideology adopted by the Post-Independence Transitional Government grounded in the economic self-sufficiency, through agricultural production, use of nationalized industries and the exploitation of natural resources.
To grasp the experience of Mozambique with the BITs, this article will be divided into four sections, namely:
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Historical Context of the Economic Reform of Mozambique;
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BITs signed by Mozambique;
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Benefits that the Mozambican State has reaped with the BITs in force; and
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Conclusions.
1. Historical Context of the Economic Reform of Mozambique
After the independence of Mozambique in 1975, one of the first measures adopted by the Government that took power, at the time presided by Marshal Samora Moisés Machel, was the centralization of the economy, through the direct intervention of the State and nationalization of private industries with the adoption of national economic and social policies. These were obviously not attractive to private investment, either national or international.
In the 1980s, Mozambique experienced a severe economic and social crisis, as a result of the failure of the socialist development strategies adopted after independence and the civil war that ravaged the country caused by the armed conflict between the Government, led by FRELIMO (National Liberation Front of Mozambique), and RENAMO (National Resistance of Mozambique).
The Government acknowledging the failure of the ideology of economic self-sufficiency and pressured internally and externally to receive food aid to overcome the economic crisis and the consequences of the war and natural calamities that plagued the country, was forced to adopt foreign policies, one of which was aimed at capitalizing foreign investment, with the approval of Law no. 4/84 of 18 August (Foreign Investment Law).
This was a great milestone for Mozambique and one of the first steps towards the end of the Marxist ideology (of centralized economy in the Government) and transition to a more liberalized economy. However, the reality that the country was facing with the civil war did not transmit security to foreign investors to bet on Mozambique.
Soon after the death of Mozambique's first President, Marshal Samora Moisés Machel, in 1986, his successor, President Joaquim Alberto Chissano, decided to adopt significant economic reforms in the country. To this end, it has joined the aid of the Bretton Woods Institutions, namely the International Monetary Fund (IMF) and the World Bank shifting to capitalist ideology, decentralizing the role of the State as an actor in economic activity and thus moving to an open economy, creating economic reforms more suitable for the development of the country.
These economic reforms were put into practice through a project called “Economic Rehabilitation Program (ERP)”, which aimed to discuss the serious economic and social crisis that the country was going through. However, the persistence of the civil war, which generated an influx of external resources to account for the existing weak state capacity and the serious social problems caused by the war (including famine), were not enough to guarantee a significant success of the ERP, arising from the government's inability to reconcile the strategies of internal and external actors, during the process of implementing economic reforms.
This situation came to change in the 1990s, with the political transition previously initiated, which highlights the introduction of a pluralist Constitution and the emergence of a process of political and administrative decentralization, as well as the end of the Civil War that resisted for long 16 (sixteen) years, through the signing of the Peace Agreement between the representatives of FRELIMO and RENAMO.
With Mozambique at peace, in 1993 the Government came up with a package of economic reforms totally aimed to a liberal economy. Law No. 4/84 of 18 August, was repealed as, on the one hand, it was considered inappropriate in the new package of economic reforms recently adopted, and on the other hand, the new legal framework should be harmonized with the rules of the Washington Convention of 15 March 1965 (ratified by Resolution No. 10/92 of 25 September) on the Settlement of Investment Disputes between States and Nationals of Other States, as well as of the respective International Centre for the Settlement of Investment Disputes between States and Nationals of Other States, and, following the retro mentioned repeal, having approved Law no. 3/93 of 24 June (Investment Law).
With the approval of Law no. 3/93 of 24 June, Mozambique has expanded the guarantees of protection of the property rights of foreign investors, with emphasis on the inclusion of industrial property rights, which nowadays, is one of the preliminary factors for a foreign investor to invest in a country.
With the guarantees contained in Law No. 3/93 of 24 June, the security and stability of the Mozambican territory (originated with the end of the Civil War), a window of opportunity was opened for Mozambique to celebrate several BITs.
2. BITs signed by Mozambique
With the end of the Civil War and soon after the approval of the Mozambican Constitution of 1990, the Mozambican Government concluded its first BIT, in this case, an Agreement for the Promotion and Reciprocal Protection of Investment with the Republic of Zimbabwe.
The conclusion of the aforementioned agreement was a green light for other states, indicating that Mozambique was open for the conclusion of BITs. But for Mozambique to be even more desirable to other countries, it was not enough just the end of the civil war, that is, the physical security of the foreign investor in the national territory, but also the legal security of the foreign investor, that their rights, as recognized by international conventions, would be safeguarded in Mozambican territory. That is why Mozambique acceded to the Washington Convention of March 15, 1965, ratified through Resolution No. 10/92 of September 25 and approved Law No. 3/93 of June 24, which became a key legal instruments to transmit the longed-for legal certainty to the foreign investor.
Indeed, after the approval of these legal instruments, Mozambique began to celebrate several BITs, as can be seen in the table below:
The purpose of the BITs signed by the Mozambican Government is to foster and protect foreign investors from the State of another Contracting Party whenever they invest in Mozambique or whenever Mozambican citizens invest in the territory of the other Contracting Party.
All BITs signed by Mozambique include the common provision of the “Most Favored Nation” principle, which states that the Contracting Parties are prohibited from treating investments made by a foreign investor less favorably than those made by domestic investors. In addition, it is provided that investors from each Contracting Party will always benefit from the most favorable treatment accorded by that Contracting Party to another nation.
This principle protects all citizens of the Contracting Parties who have signed a BIT with Mozambique and represents a guarantee of non-discrimination.
In addition to the protection of the investor and his investment, the BITs also establish clear rules for the settlement of disputes. Most of the BITs signed by Mozambique State that, in the event of a dispute, the parties must attempt to resolve it amicably within six months of the date on which the dispute arose.
In addition, BITs generally stipulate that the parties waive the right to demand that all domestic administrative or judicial remedies be exhausted in the first place and that it is the investor's choice to choose to submit the dispute to judicial entities or to international arbitration as mentioned below.
The two most common rules for dispute resolution are: (i) submission of the dispute to the International Centre for Arbitration of Investment Disputes (ICAID) for arbitration under the Washington Convention of 18 March 1965 on the Settlement of Investment Disputes between States and Citizens of Other States; or (ii) arbitration established in accordance with the Rules of Arbitration of the United Nations Commission on International Trade Law (UNCITRAL).
3. Benefits that the Mozambican State has reaped with the BITs in force
A fundamental guiding principle of BITs is that they bring benefits to contracting countries, especially to a developing country such as Mozambique. In a historical context, the use of BITs has provided benefits to the country, of which the following can be highlighted:
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Creation of productive pillars – Mozambique has a weak justice and governance system. To encourage foreign investors to make high investments, they need to be assured that their investments are protected. BITs were designed for just this purpose. Therefore, historically, BITs have helped to create productive pillars in Mozambique (e.g. human capital capacity building and infrastructure investment) that would not be present without giving special protection to investors;
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Attraction of FDI – BITs materialize through FDI, investments that have brought foreign exchange to the country, deposited in the financial system. Foreign exchange is used for private sector imports, not only for FDI projects but for the entire economy;
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Job creation – FDI has the potential to create new jobs in the recipient country. This has a multiplier effect that does not result directly from the implementation of a BIT but is at the discretion of the private sector. It should not be lost sight of that foreign private investors come to Mozambique mainly to make profits and not to help solve the country's unemployment problem; and
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Creation of links with domestic companies – any foreign company, even when temporarily importing a large part of production equipment, needs support from domestic companies. The conditions offered in the BITs helped bring in FDI that created upstream and downstream links with domestic companies.
Of course, there may be other benefits that the Mozambican State has reaped from the BITs, and the ones listed above seem the most relevant.
4. Conclusions
The BITs signed by Mozambique have become one of the main mechanisms for attracting FDI in recent decades, because Mozambique, by being part of a BIT and complying with its terms, will be giving a clear signal to international investors that it would be safe to invest in the country, in which it maintains good diplomatic relations with the investor's State of origin and in case of conflict, there are legal mechanisms to protect it.
It is true that there are still a considerable number of Contracting States that have signed BITs with Mozambique, but which have not entered into force, for various reasons, a factor that may contribute to the weak interest of investors from these States in Mozambique.
- Emanuel Nhanombe, Associate Lawyer, JLA Advogados -
