Discussions
South Africa’s Promotion and Protection of Investment Bill
Sean Woolfrey, tralac Researcher, discusses South Africa’s recently-published draft Promotion and Protection of Investment Bill
At the beginning of November, the South African government published the much anticipated draft Promotion and Protection of Investment Bill. The Bill has been introduced as part of an overhaul of the regulatory framework for foreign investment in South Africa, an overhaul that was initiated following a Government review of the country’s policy on bilateral investment treaties (BITs). This overhaul has seen the Government cancel its BITs with Belgium and Luxembourg, Spain, Germany and Switzerland, and indicate that it will terminate the remaining BITs it has with European countries and discuss termination with other, non-European countries with which it has entered into BITs. The Investment Bill will effectively replace these bilateral treaties by providing domestic legislation that sets out the rights and obligations of the Government, and of all investors, both local and foreign.
The response to the Government’s attempts to “update and modernise” South Africa’s investment regime has been mixed. On the one hand, some commentators have applauded the Government for “taking the lead” in seeking to rebalance the rights and responsibilities of states and investors. Nobel laureate Joseph Stiglitz has suggested that South Africa should be “congratulated” for the “pro-development” nature of its actions and for demonstrating its “commitment to the rule of law”, and that other countries should “follow suit”. On the other hand, some European officials have signalled their displeasure with South Africa for unilaterally cancelling its BITs instead of seeking to renegotiate the treaties, and have suggested that the termination of South Africa’s BITs could have a negative effect on investor confidence. European Commissioner for Trade, Karel de Gucht, even went so far as to describe South Africa’s termination of its BITs as “bad policy”.
While there has been some criticism of the South African government’s failure to effectively communicate the reasons behind its decision to cancel its BITs and replace them with a single piece of domestic legislation, much of the criticism emanating from the ‘investment community’ has revolved around the belief that the protection offered to foreign investors under the Investment Bill is of a lower standard than that provided for under South Africa’s BITs. The Government, for its part, has stressed that the draft Promotion and Protection of Investment Bill contains “more than enough clarity, transparency and certainty around the domestic investment regime” and that it provides “adequate protection to all investors, including foreign investors”.
It is clear from the contents of the Bill, however, that the Bill does not provide the same standard of protection for foreign investors as provided under South Africa’s various BITs. For one thing, the Bill contains no obligations regarding the ‘fair and equitable treatment’ of foreign investment. Most BITs, including those signed by South Africa, contain a provision obliging both state parties to the treaty to provide fair and equitable treatment to investments made in their territory by nationals of the other party. Such a provision potentially allows foreign investors to seek compensation if the conditions under which their investment was made (including any applicable domestic regulations) are later changed in ways detrimental to their interests.
In line with common practice, South Africa’s BITs prohibit the nationalisation or expropriation of foreign investments as well as any ‘measures having an equivalent effect’, except where this is undertaken in a non-discriminatory manner for a public purpose in line with domestic law. By contrast, the draft Investment Bill says only that investments “may not be expropriated except in accordance with the Constitution and in terms of a law of general application for public purposes or in the public interest”. The Bill also explicitly highlights a number of measures which “do not amount to acts of expropriation” under the Bill, including measures which have an “incidental or indirect adverse impact on the economic value of an investment” and measures which aim to protect or enhance legitimate public welfare objectives”.
In failing to address the issue of ‘measures having an equivalent effect’ or to expressly state that expropriation has to be carried out in a ‘non-discriminatory’ manner, and in stating that certain types of measures cannot be considered to be expropriation, the Investment Bill provides a very narrow conceptualisation of expropriation and increases the leeway for the Government to enact measures which many investors might consider to involve some form of ‘effective’ or ‘indirect’ expropriation. Under BITs, investors could pursue compensation in response to such measures, but under the new investment regime being introduced by the South African government, this is likely to prove far more difficult.
In addition, the Investment Bill allows the Government to provide less than full market value compensation in cases of expropriation, providing that certain conditions apply. This contrasts with the blanket guarantee of ‘full market value’ found in South Africa’s BITs. In line with the South African Constitution, the Bill specifies that compensation for expropriation must be ‘just and equitable’, and that market value is just one of a number of factors to be considered when determining how this standard is to be applied. While this does not mean that compensation for expropriation under the new regime will always be less than market value, or that it will necessarily be significantly less than market value, it does open up these possibilities, and, in so doing, creates additional uncertainty for foreign investors who had previously been assured of full market value compensation if their investments were ever expropriated.
Finally, and perhaps most significantly, the Investment Bill does not provide investors with recourse to international arbitration. Under the Bill, investors can only bring a dispute to a South African court or to the South African government for mediation. Recourse to international arbitration is a standard feature of BITs and one much prized by investors, as it means they are not restricted to pursuing a dispute against a particular country through that country’s own legal system, which may function poorly, may lack transparency, efficiency and independence or may simply be biased towards its own government’s interests. Instead, international investor-state arbitration allows investors to access a system of international arbitration that is, if anything, likely to be slightly biased towards the commercial interests of investors.
Interestingly, the draft Bill does not address the fact that the Finance and Investment Protocol (FIP) of the Southern African Development Community (SADC), an agreement to which South Africa is party, allows foreign investors who have invested in the SADC region (including South Africa) to take investment-related disputes against a party to the agreement to international arbitration. In practice, this might mean that South Africa’s cancellation of its BITs has not actually foreclosed the possibility of foreign investors taking South Africa to international arbitration.
It is clear from the preceding analysis that there is truth in the claim that the South Africa’s overhaul of its investment policy will result in many foreign investors being less protected than they are currently under South Africa’s various BITs. It does not follow, however, that the South African government is wrong to overhaul its investment policy in this way. Indeed, judging whether the cancellation of South Africa’s BITs and their replacement with the envisaged domestic legislation is in the interest of the South African public is more complicated than simply arguing that it is not in the interest of foreign investors.
For one thing, the Government’s actions are motivated by a legitimate and widely shared concern that bilateral investment treaties and the international system of investor-state arbitration inhibit the ability of governments to enact legislation and regulatory measures aimed at promoting public policy objectives in areas such as public health, environmental protection and social equality. Provisions relating to fair and equitable treatment and to measures having an equivalent effect to expropriation have been criticised as being too broad and vague and have been subject to inconsistent interpretation by arbitration tribunals. Investors have sought to use such provisions to sue governments for enacting measures that the investors perceive to have had a detrimental effect on their investments, regardless of the actual intent of the measures involved. For instance, a group of European investors, invoking South Africa’s BITs with Italy and with Belgium and Luxembourg, brought a claim against South Africa following the introduction of Black Economic Empowerment (BEE) regulations in the mining sector. Cigarette maker Phillip Morris is also currently attempting to sue the Australian government under the Australia-Hong Kong BIT in response to Australia’s introduction of plain-packaging regulations pertaining to the sale of cigarettes.
In cancelling its BITs, and in introducing domestic legislation which is consistent with the Constitution, which omits a provision on fair and equitable treatment, which conceptualises expropriation very narrowly and which precludes access to international arbitration, the South African government has not only levelled the playing field in terms of the protection offered to local investors vis-à-vis foreign investors, it has also safeguarded its ability to enact measures and legislation in the public interest. Doing this involved dealing with an inherent trade-off. In order to ensure that the potential claims of foreign investors do not impinge on domestic policymaking, some limits have to be placed on the rights of foreign investors and a lower standard of protection for investment is pretty much unavoidable.
While this may lead to South Africa being viewed less favourably as an investment destination, it is possible that the proposed decrease in the standard of protection for foreign investment that will occur with the shift from BITs to domestic legislation may not actually have any noticeable effect on foreign domestic investment in South Africa. There is little convincing evidence that BITs actually promote investment, or that multinational corporations base their foreign investment decisions largely on the availability of BIT protection. In the South African context issues pertaining to political risk, labour relations, mining legislation, BEE requirements, the quality and reliability of energy, transport and communications infrastructure, human capital shortcomings and the use of trade and investment policy are just some of the factors that are likely to be far more crucial determinants of the country’s ability to attract foreign investment.
Ultimately, judgment of the Government’s policy shift on investment hinges on the impact of its measures on South Africa’s ability to attract foreign investment and on what the Government does with its newly safeguarded ‘policy space’. If foreign inflows of investment are unaffected and if the government uses its policy space to enact measures genuinely in the public interest – however that may be defined – then the investment policy overhaul should be commended. If, on the other hand, South Africa’s image as an investment destination suffers significant damage and potential investors are deterred, then the Government will need to explain how and why its increased policy space will compensate for the damaging effects of this loss of investment revenue.
Sources:
Greve, N. 2013. “Investment Bill imposes no new obligations on investors – Davies”, Engineering News, November 4, 2013. Available at: http://www.engineeringnews.co.za/article/investment-bill-imposes-no-new-obligations-on-investors-davies-2013-11-04
Stiglitz, J. E. 2013. “South Africa Breaks Out”, Project Syndicate, November 5, 2013. Available at: http://www.project-syndicate.org/commentary/joseph-e–stiglitz-on-the-dangers-of-bilateral-investment-agreements
Marais, J. 2013. “South Africa pays dearly after scrapping trade treaties”, Business Day, July 21, 2013. Available at: http://www.bdlive.co.za/business/trade/2013/07/21/south-africa-pays-dearly-after-scrapping-trade-treaties