South Africa’s new investment policy framework and protection for SA firms investing abroad
Sean Woolfrey, tralac Researcher, discusses South Africa’s new investment policy framework
In his 2013 Budget Speech delivered in Cape Town last week, South African Minister of Finance, Pravin Gordhan, highlighted a number of outward investment reforms as part of the ‘Gateway to Africa’ reforms which aim to boost South Africa’s position as a base for investment into the rest of Africa and further afield. These new reforms, which have been broadly welcomed by the South African business community, include the relaxation of cross-border financial regulations and tax requirements on companies and measures to make it easier for banks and other financial institutions in South Africa to invest and operate in other countries. It is interesting to juxtapose these reforms, which seek to create a more supportive environment for South African companies seeking to expand into the rest of Africa and offshore, with the South African government’s ongoing revision of the country’s investment policy framework, and, in particular, its decision to overhaul its policy on bilateral investment treaties (BITs).
A previous tralac discussion note highlighted the fact that following a review of the country’s BIT policy, the South African government has decided to refrain from entering into BITs in the future, “except in cases of compelling economic and political circumstances”, and to review its existing BITs “with a view to termination, and possible renegotiation on the basis of a new Model BIT to be developed”. The note also suggested that given the tenuous relationship between BITs and increased inward investment, and the tendency for BITs to constrain domestic policy space and to allow for investors to circumvent domestic legal systems and the public interest safeguards contained therein, a move from using BITs to protecting inward FDI under clear and appropriate domestic legislation may provide a better way for South Africa to promote and protect investment while also addressing the developmental imperatives facing the country.
What the note did not discuss, and what has not really been prominent in the debate surrounding South Africa’s overhaul of its BIT policy, is the point that BITs are a two-way tool. BITs serve not only to protect and promote inward investment in a particular country, but also to provide protection for that country’s companies when they invest in the countries with which their home country has a BIT. For that reason, the role and impact of BITs should be considered not only in terms of their effect on inward investments, but also on their ability to protect and promote outward investments. It is not clear, however, whether the South African government has given sufficient consideration to the role BITs have played – or potentially could play in the future – in facilitating South African investments in the rest of Africa and beyond.
Certainly, it is probably not the case that the needs of South Africa’s outward investors have been completely neglected by the government. The BIT policy review, for instance, refers to the needs that may be articulated by South African companies seeking to invest in the rest of Africa or further afield and also mentions the fact that different considerations apply depending on whether inward or outward investment is being considered. Nevertheless, the presentation on BITs made to the Parliamentary Portfolio Committee on Trade and Industry last month by the Department of Trade and Industry (DTI) focused on the inward side of the equation, and did not specifically address the potential needs of South African firms seeking to expand operations outside of South Africa.
In the presentation, the DTI provided the outlines of an evolving government policy on investment. This includes the development of a New Investment Act which will seek to protect inward investments by codifying typical BIT provisions into domestic law and a commitment to terminating existing ‘first generation’ BITs and refraining from entering into BITs in the future, except under certain compelling circumstances. Notably, however, the government does not appear to be doing away with the BIT concept altogether, and is in fact seeking to develop a new Model BIT to be used as the basis for future (re)negotiations. In the presentation, reference was also made to the development of alternative investment protection instruments.
If the government truly wants to support South African companies’ in their efforts to expand into the rest of Africa and into markets further afield, then the development of a Model BIT and/or other investment-related instruments could provide an ideal opportunity to consider the needs of South African investors looking to invest in other African countries and in the rest of the world. That this is an important issue was highlighted by recent moves by the Zimbabwean government to ‘compulsorily acquire’ a substantial proportion of the mining rights of Zimplats, a local subsidiary of South African-listed firm Impala Platinum (Implats). Whether the potential for such incidents justifies the use of BIT-style instruments is not entirely clear, however, and other potential instruments for protecting South African investment abroad may be more appropriate.
Nevertheless, it is very important that the government recognises that while South Africa is a major destination for foreign investment, South African firms are themselves becoming increasingly significant investors abroad – and especially in the rest of Africa – and that this important fact should play a central role in considerations on the development of a new investment policy framework for the country.
Department of Trade and Industry. 2013. Update on the Review of Bilateral Investment Treaties in South Africa. Available online at: http://www.safpi.org/sites/default/files/publications/dti_review_of_bits_ppc_20130215.pdf
National Treasury. 2013. Gateway to Africa and other reforms. Available online at: http://www.treasury.gov.za/documents/national%20budget/2013/review/Annexure%20W3.pdf
Woolfrey, S. 2012. South Africa’s stance on bilateral investment treaties. Available online at: http://www.tralac.org/discussions/article/5287-south-africa-s-stance-on-bilateral-investment-treaties.html