Why Kenya should not sign any more Bilateral Investment Treaties

Post date: Thu, Sep 4, 2014 |

Category: General |

Foreign Direct Investment inflows have had minimal contribution to Kenya’s GDP. A quick glance at the World Development Indicators database reveals that this figure stood at less than 1% for all but six years in the period between 1970 and 2012. In 2012, for example, the net FDI inflow to Kenya was USD 259 million (0.64% of GDP), much lower than Uganda’s USD 1.2 trillion (6.02%), Tanzania’s USD 1.7 trillion (6.04%).

Basically, BITs are a signal that the host country is serious in protecting the foreign investor’s assets. In the case of developing countries like Kenya, the credibility of that signal is moot.

he United Nations Conference on Trade and Development (UNCTAD) indicates that Kenya has signed BITs with the following countries: Burundi, China, Finland, France, Germany, Iran, Italy, Kuwait, Libya, Netherlands, Slovakia, Switzerland, and the United Kingdom. There are ongoing negotiations for a BIT between the East African Community and the United States. It is worth mentioning that AGOA expires in 2015, and the US will most likely use the carrot of an extended AGOA as leverage in the negotiations. The recent discovery of oil and minerals in Kenya has attracted foreign companies, which will definitely lobby their domicile states to negotiate for BITs to protect their investments.

The stubborn reality that politics (global and domestic) frequently leads to unsound economic policy notwithstanding, it is my opinion that Kenya should let the signed BITs expire, and abstain from any new ones.

Firstly, the claim that BITs will increase the amount of FDI should be taken with a grain of salt. ÂÂ Studies reveal little direct correlation between the amount of FDI and BITs. In fact, some developing countries like Brazil do receive a lot of foreign investment even with the absence of BITs. The fact of the matter is that investors will always seek opportunity if the potential for returns is attractive enough; legal and institutional challenges are a secondary, though important, consideration.

Secondly, as indicated above, BITs are a means of drumming up investor confidence in the institutional integrity of the host country. In other words, a BIT signals that the political and legal structures of the host country are fair, stable, and conducive for business (or explicitly stated, not injurious to investment). Merely signing a BIT, however, is not evidence of the existence of such a regime. If anything, such an agreement would probably promote institutional complacency. For instance, there will be little incentive for foreign investors to push for reform in a judiciary because of the availability of international courts in which they can seek recourse.ÂÂ

Thirdly, providing unfettered access to investors from select countries accords them unfair advantage over those from countries with which there is no such agreement. Such discrimination hampers competition and discredits the notion of a level playing field that the Kenyan government touts while courting investors. For economic growth of any country, a free and fair market that is driven by healthy competition (forces of demand and supply) is key.

Fourthly, the ongoing adjustments attendant to the implementation of the new constitution necessitate a pause in BIT negotiations. Specifically, there are a number of investment-related bills still under discussion. Changes in the laws affecting enterprises like the extractives sector, which has drawn significant investor interest, would be actionable. South Africa, an example not far from Kenya, has opted not to proceed with more BITs after foreign investors pressed charges at the Washington, D.C.-based International Centre for Settlement of Investment Disputes (ICSID), claiming that changes in some of its laws amounted to expropriation of investments because the changes reduced the value of the investment assets. Kenya has not been challenged at ICSID yet; rushing into unsuitable BITs would only expose the country to suits.

Policymakers would do well to think hard on costs and benefits of trading off Kenya’s sovereignty for international credibility by signing BITs

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