On 30 September 2018, hours before the 1 October 2018 deadline, the Government of Tanzania notified the Government of the Netherlands of its intention to terminate the bilateral investment treaty (BIT) between both nations. Under the BIT, a notice of termination was required to be given at least six months before the date of its expiry, on 1 April 2019.
On 25 March 2019, the Government of the Netherlands issued a notice on its foreign relations website stating that despite efforts to seek a temporary extension of the existing treaty and/or a speedy start of renegotiation of the treaty, there had been no progress and consequently, it would expire on 1 April 2019.
The Tanzania–Netherlands BIT was signed on 31 July 2001 in Dodoma, Tanzania, and came into force on 1 April 2004 (accessible here). It has been in force for the last 15 years and would have automatically renewed for a further term of 10 years (until 1 April 2029) had it not been terminated.
Basis for termination of the BIT
Civil Society Organisations (CSOs), both Dutch and Tanzanian, had in the recent past voiced their concerns and had pushed for the review of the treaty, which in their view was rigid and did not serve the best interests of Tanzania. In lobbying the decision makers in Tanzania, the CSOs wanted the treaty to be revised to state, among other issues, the right of the host country to introduce new laws, rules and regulations on investment which would apply to every investor, including those protected under the BIT. The treaty further prohibited the host country from according investors relying on it a less favourable treatment than that accorded to its own investors or investors of a third state.
Interestingly, the treaty did not contain provisions relating to modalities for its amendment or renegotiation while in force. This meant that unless it was terminated upon expiry (as has been done), it could not be legally possible to amend or renegotiate it while in force.
Noteworthy, in the past year or two, the Tanzanian parliament has passed laws that are aimed at protecting national resources. These laws include the Natural Wealth and Resources Contracts (Review and Re-negotiation of Unconscionable Terms) Act, 2017 and the Natural Wealth and Resources (Permanent Sovereignty) Act, 2017. The Public Private Partnership (Amendment) Act, 2018 also introduced amendments to the Public Private Partnerships (PPPs) regime whereby all PPP agreements are now subject to local arbitration under the arbitration laws of Tanzania and/or conclusively dealt with by Tanzanian courts.
The termination of the BIT, therefore, does not come as a surprise given the backdrop of recent legislative changes in Tanzania that are unharmonious with the treaty’s provisions.
Why are BITs important?
BITs play a key role in cross border investments if drafted carefully. They are treaties between two countries containing reciprocal undertakings to ensure promotion and protection of private investments made by individual and corporate investors from respective contracting states.
Foreign investors enjoy special legal rights, including the exclusive access to international arbitral procedures, rather than local courts, against the host state under the International Centre for the Settlement of Investment Disputes, which allows investors to sue governments for financial compensation when certain provisions of the treaty are violated.
In a bid to promote foreign direct investments, many African governments, including the East African countries, have negotiated BITs with other nations, particularly European nations. BITs offer investors of the respective contracting states special protection by committing host governments to various provisions, including prompt, adequate and effective compensation in the event of substantial interference with investment and ensuring an investor receives treatment no less favourable than that accorded to national investors, or investors from third states (Most-Favoured Nation Treatment). All these protections aim at providing financial confidence to investors in the host country.
Impact of the termination of the BIT on Dutch investments in Tanzania
From 1 April 2019, new Dutch investors in Tanzania and new Tanzanian investors in the Netherlands can no longer rely on the special protections provided under the BIT and will instead rely on the host national legislation for the protection of their investments and dispute resolution. Nonetheless, Dutch and Tanzanian investors who had invested in the respective host state before 1 April 2019 will continue to rely on the special protection under the BIT for a further period of 15 years (until 1 April 2034).
While it is acknowledged that emerging economies such as Tanzania require bilateral agreements to attract and promote foreign direct investments, such agreements should be well drafted to ensure the protection of the host nation’s interests, including reviewing and introducing new laws and regulations to adapt to the changing business environment.
The Government of Tanzania has not yet given an indication whether or not it will negotiate a new BIT with the Netherlands despite the Netherlands showing interest to negotiate. If a new BIT is to be negotiated, the entire process may take up to four to six years to complete taking into consideration the time needed for negotiations and ratification of a new treaty.
The content of this alert is intended to be of general use only and should not be relied upon without seeking specific legal advice on any matter.