Guiding principles for Investment Policy-Making – A South Africa Scorecard
Ashly Hope, tralac Research Advisor, and Talkmore Chidede, tralac Intern, provide an analysis of South Africa’s foreign investment regime according to the G20 Guiding Principles for Investment Policy-Making
At the 2016 Hangzhou Summit, G20 leaders endorsed a new set of “Guiding Principles for Investment Policy-Making”. The nine non-binding principles are intended to promote inclusive and sustainable growth via a coherent, open and conducive international environment for investment.
As a member of the G20, South Africa has endorsed these principles, however, changes to investment laws – including the controversial Protection of Investment Act (PIA); and the cancellation of bilateral investment treaties (BITs) in recent years has created some negative sentiment about investment in the country. At the same time, South Africa’s foreign direct investment (FDI) inflows have decreased to the lowest level in a decade dropping from US$5.77bn in 2014 to US$1.77bn in 2015.
In light of this, we assess South Africa’s foreign investment regime and environment against the new principles.
Almost all sectors are open to foreign investors and no government approvals are required for foreign investors to establish a new business or invest in the country.
Our rating: very good
Openness to investment
- The PIA reaffirms South Africa’s commitment to “maintain an open and transparent environment for investment”. Plus, in line with the Constitution, the Act does not discriminate against foreign investors.
In the World Bank 2016 Ease of Doing Business Rankings, South Africa dropped from number 69 to 73 out of 189 economies, signaling a decreasingly investment friendly business environment.
The OECD predicts that this year “investment will grow modestly, deterred by… an uncertain policy environment,” while the International Monetary Fund has recently indicated that political uncertainty in South Africa and concerns around governance and corruption continue to damage investor confidence.
Our rating: improvement needed.
The PIA gives legal protection to investors and their investment consistent with the Constitution and which purports to be consistent with international law.
On the World Economic Forum (WEF) Global Competitiveness Index 2015/16, South Africa ranks, out of 140 economies, number: 14 in strength of investor protection; 24 in terms of protection of property rights; 24 in protection of intellectual property rights; 14 in efficiency of legal framework in settling disputes; 24 in terms of judicial independence?
The Act has been criticised by some international investors. In particular, the provisions relating to expropriation and access to international arbitration are perceived to offer a lower standard of protection than provided under BITs and international law – including the current South African Development Community (SADC) Finance and Investment Protocol (FIP).
On resolving disputes, in the World Bank’s Doing Business Report, South Africa is ranked 119, down from 117 in the previous year. The World Bank states that resolving disputes in South Africa takes nearly two weeks longer than the time needed in OECD high-income economies and is one-third more expensive.
Our rating: satisfactory
Stakeholder participation and institutions
South Africa uses a Regulatory Impact Assessment meaning a new policy or law should be subjected to rigorous public consultation, including an expansive public comment period and consultation within National Economic Development and Labour Council and government before it is endorsed by the Cabinet, and this process was completed for the PIA.
Our rating: good
Investment for sustainable development and inclusive growth
South Africa’s Minister of Trade and Industry, Rob Davies, has indicated that the most recent investment policy “places inclusive growth and sustainable development at the centre of efforts to attract and benefit from investment.”
In terms of domestic coherence, South Africa’s investment policies are mixed – with some measures seemingly intended to encourage and promote investment, while changes to the expropriation and investment protection regimes have the opposite effect.
Further to this, the inconsistency with international practice and the possible conflict with the South Africa’s regional obligations under the SADC FIP suggest a lack of coherence with international principles. So, while, the Government’s policies are clearly directed to sustainability and inclusivity, the growth aspect – should that growth be driven by FDI – may be compromised.
Our rating: improvement needed
Right to regulate
One of the main reasons why South Africa unilaterally cancelled most of its old-generation BITs was that the government felt that these treaties “posed unacceptably high risks to its legitimate and sovereign right to regulate in the public interest.”
The PIA is mostly driven by the desire to carve out more policy space for black economic empowerment and industrial policy including beneficiation. The PIA allows legislative measures such as the Broad-Based Black Economic Empowerment to be applied to both foreign and domestic investors, in an attempt to ensure that the socio-economic benefits of FDI are inclusive, safeguarding the right to regulate, while protecting investment.
Our rating: very good (noting, however, that some clearly seeing it as having gone too far.)
Investment promotion and facilitation
South Africa’s provincial investment promotion agencies are tasked with attracting and facilitating investment through diverse means including, investor facilitation and services and investment generation, and policy advocacy.
InvestSA is a one-stop shop that is intended to facilitate FDI by coordinating and accelerating government departments’ approvals – it won the 2016 UNCTAD Global Investment Promotion Agency Award for partnership and excellence in investment promotion.
Our ranking: good (because it is still in early stages)
Corporate governance and responsibility
The Guidelines for Good Business Practice by South African Companies Operating in the Rest of Africa aim to promote responsible corporate citizenship by encouraging a commitment to compliance with the laws and policies of the host countries and adherence to international best practice contained in the UN Global Compact.
The King Code on Good Governance in South Africa. The King Code constitutes non-binding guidelines and standards of best practices in corporate governance focusing on social, environmental and economic concerns. Compliance with this Code is compulsory for listed companies in South Africa and other companies generally apply the Code.
Our rating: very good.
South Africa is a member of SADC and was instrumental in the development of the SADC Model BIT and an early adopter of national investment legislation reflecting the Model BIT. Next year, South Africa will chair SADC giving it an even stronger leadership role in the investment policy dialogue in the region.
As the only African economy, and as a representative of emerging and developing economies in the G20, South Africa can be seen as leading by example with its new investment policy – but on the other hand, it has diverged somewhat from global norms.
Our rating: satisfactory.
Despite some negative investor sentiment regarding expropriation and the lack of recourse to international arbitration, as well as ongoing political uncertainty we think that overall South Africa’s investment framework broadly meets the new principles. On our scale, it rates between satisfactory and good.
These new principles, while by no means ground-breaking, explicitly recognise states’ right to regulate, and the importance of sustainable and inclusive growth. We think the current investment regime in South Africa balances fostering sustainable development and inclusive growth and enhancing space for legitimate public policy purposes in a framework where there is transparency and appropriate flexibility in order to protect and promote FDI. However, this shift towards a more inclusive FDI model (with all its merits), coupled with the increasing political and policy uncertainty around investment in the country, may well deter some investors.
 G20 Guiding Principles for Global Investment Policymaking: Available at https://www.tralac.org/images/docs/10066/g20-trade-ministers-statement-annex-iii-g20-guiding-principles-for-global-investment-policymaking-july-2016.pdf
 United Nations Conference on Trade and Development (UNCTAD) World Investment Report 2016. Investor Nationality: Policy Challenges (United Nations publication, Sales No. E.16.II.D.4) available at https://www.tralac.org/images/docs/9932/unctad-world-investment-report-2016-key-messages-and-overview.pdf
 United States Department of State Investment Climate Statements 2016: South Africa http://www.state.gov/e/eb/rls/othr/ics/investmentclimatestatements/index.htm#wrapper
 OECD FDI Regulatory Restrictiveness Index https://stats.oecd.org/Index.aspx?DataSetCode=FDIINDEX
 The Index covers 58 countries, including all OECD and G20 countries and measures the restrictiveness of a country’s FDI rules by examining four main types of restrictions: foreign equity restrictions; discriminatory screening or approval mechanisms; restrictions on key foreign personnel and operational restrictions. While this OECD Index is not a full measure of a country’s investment climate.
 Doing Business Rankings rates countries by gauging the time, cost and hassles for business to comply with legal and administrative requirements. It measures a number of indicators including the efficiency of contract enforcement. World Bank Ease of Doing Business Rankings 2016 http://www.doingbusiness.org/rankings
 OECD “South Africa - Economic forecast summary (June 2016)” http://www.oecd.org/economy/south-africa-economic-forecast-summary.htm
 “Political uncertainty in South Africa a concern: IMF” 2016 http://www.sabc.co.za/news/a/d3bc1c004d8ef2879925dd4bb456f37b/Political-uncertainty-in-South-Africa-a-concern:IMF-20162007
 “WEF Global Competitiveness Index” http://reports.weforum.org/global-competitiveness-report-2015-2016/competitiveness-rankings/
 Detailed summary of the efficiency of contract enforcement is available at http://www.doingbusiness.org/data/exploreeconomies/south-africa/enforcing-contracts/
 World Bank Group Doing Business in South Africa 2015: Comparing Business Regulations for Domestic Firms in 9 Urban Areas and 4 Major Ports with 188 other Economies http://www.doingbusiness.org/~/media/GIAWB/Doing%20Business/Documents/Subnational-Reports/DB15-South-Africa.pdf 54.
 The Minister of Trade and Industry, Dr Rob Davies, at the Discussion of UNCTAD’s Investment Policy Framework for Sustainable Development (IPFSD) in Geneva, Switzerland https://www.thedti.gov.za/delegationspeechdetail.jsp?id=2506
 “New Protection of Investment Act – The Implications for Foreign Investors” http://www.caveatlegal.com/new-protection-of-investment-act-the-implications-for-foreign-investors/#sthash.nj722QQ7.dpuf
 DTI “Foreign Direct Investment Regulation: A brief History” https://www.thedti.gov.za/parliament/2015/Langalanga.pdf+&cd=8&hl=en&ct=clnk&gl=za