ICSID Arbitration Filed Over South Africa’s Black Empowerment Program

European-based investors in South Africa’s mining industry have mounted an international arbitration against the South African Government alleging that that country’s new Black Economic Empowerment (BEE) mining regime violates the terms of investment protection treaties concluded by South Africa with Italy and Luxembourg.

The individual investors, all Italian nationals, allege breach of the protections contained in the Italy-South Africa investment treaty; in addition, their Luxembourg-based holding company, Finstone (PTY) Ltd SA, alleges violations of a separate investment treaty concluded by South Africa with Belgium and Luxembourg.

Collectively, the European investors hold large investments in the natural stone (e.g. granite) business in South Africa. In an interview in late 2005, Mario Marcenaro said that his family – together with another Italian family also involved in the current arbitration – controls some 80% of South Africa’s stone exports.

The claim, which was formally registered by the Washington-based International Centre for Settlement of Investment Dispute (ICSID) on January 8th, is likely to be a politically sensitive one, as foreign investors, for the first time, invoke international law protections in an effort to challenge central tenets of the ruling-African National Congress’s (ANC) Black Economic Empowerment policy.

The Mineral and Petroleum Resources Development Act (MPRDA), which came into force in May of 2004, served to vest all mineral and petroleum rights with the South African Government.

Under the new framework, businesses must apply to the South African Government – within a given time frame – for a right to convert their former holdings into “new-order” rights, which are held and used under license from the state.

As part of this conversion process, South Africa’s Department of Mining and Energy will take into account the South African Constitution’s overall goal of redressing historical, social and economic inequalities – and the progress of applicant companies in meeting targeted social, labour and development objectives set out in a broad-based socio-economic empowerment mining charter.

In the 2005 interview Mr. Marcenaro said that the social requirements were “very onerous” for small, family-held companies – pointing to affirmative action requirements for the hiring of Black or Historically Disadvantaged managers, as well as a looming obligation to sell 26% shareholdings to Black or Historically Disadvantaged Individuals. In the recent economic climate, where a strengthening South African currency has buffeted mineral exports, he says the prospect of finding a willing buyer who will pay a market price for such shareholdings is unlikely.

In legal terms, the claimants say that the MPRDA extinguished their ownership of mineral rights in South Africa, without providing “prompt, adequate and effective compensation” as required under South Africa’s investment treaties.

The claimants also allege that they have been denied fair and equitable treatment – as required under South Africa’s treaties – by virtue of being forced to divest 26% of their investments to Historically Disadvantaged South Africans (HDSAs)

In addition, the claimants allege that they are victims of “discrimination” – contrary to the fair and equitable treatment guarantee – thanks to their being treated less favourably than Historically Disadvantaged South Africans. The claimants in the ICSID case maintain that their investments were made after the end of Apartheid in South Africa, and that as a consequence of this, the investors did not benefit from past injustices during the Apartheid era.