Will South Africa modify its GATS commitments?
JB Cronjé, tralac Researcher, discusses South Africa’s regulation of the private security industry and willingness to negotiate the withdrawal of existing GATS commitments
The Private Security Industry Regulation Amendment Bill of 2012 has been awaiting Presidential assent and signature since March 2014 when it was passed through both houses of parliament. The Bill provides in section 20 that a security business may only be registered if (among other requirements) “at least 51 percent of the ownership and control is exercised by South African citizens”. The Bill gives the Minister of Police the authority to “taking into account the security interests of the Republic, prescribe by regulation a different percentage of ownership and control in respect of different categories” of security businesses. The Minister must, by regulation, prescribe how he intends to undertake the “verification of ownership and control of security businesses”. The Bill also extends discretionary powers to the Minister to exempt certain businesses or categories of businesses from this provision after taking into consideration recommendations made by a yet to be established Exemption Advisory Committee.
As a founding Member of the World Trade Organization (WTO), South Africa must fulfil all the obligations assumed by it under all WTO Agreements including the General Agreement on Trade in Services (GATS). The WTO, and all its agreements, forms a single package from which Members cannot selectively pick and choose which agreements to join and implement. During the Uruguay Round of Multilateral Trade Negotiations, South Africa made extensive trade liberalisation commitments in many services sectors and sub-sectors for the reduction or elimination of restrictions on market access and national treatment. For example, South Africa made full liberalisation commitments on ‘investigation and security’ services under GATS. This includes a market access commitment not to maintain or introduce measures that would limit “the participation of foreign capital in terms of maximum percentage limits on foreign shareholding or the total value of foreign investment” (GATS Article XVI(f)). Therefore, introducing a domestic measure limiting foreign participation in the private security industry would constitute a clear violation of South Africa’s commitments under the GATS (GATS/SC/78, 14 April 1994).
On 19 March 2015 the Minister of Police said in his address to a Private Security Industry Conference that the private security industry poses a potential threat to national security because “we are aware that this industry increasingly gathers intelligence which sometimes can compromise national security. Some of these companies have strong links outside the country and it would really be unrealistic not to guard against these potential dangers”. This is ostensibly the rationale behind the proposed limitation on foreign ownership and control of private security companies. It suggests that foreign owned and controlled security companies incorporated and operating under South African law are conducting activities that could pose a threat to national security and that they are serving foreign (state) interests. Such a suggestion must be false, because if one starts insinuating that the interests of foreign private companies are tantamount to the interests of foreign states one could become suspicious of all foreign direct investment. The logical question then remains why the Minister chose not to address his concern by regulating the activities of all private security companies.
Nonetheless, the Minister conceded that the introduction of the proposed provision would be problematic given South Africa’s existing GATS commitments and said “According to Article XXI of the GATS, A Member (referred to in the Article as the “modifying Member”) may modify any commitment in its Schedule”. He went on to say “Government is intending to withdraw from its commitments under GATS and/or BITs [Bilateral Investment Treaties]”.
According to GATS Article XXI(1)(b) a Member must communicate such intention to the WTO “no later than three months before the intended date of implementation of the modification or withdrawal”. Thereafter certain prescribed procedures must be followed before a Member is legally permitted to implement the intended modification or withdrawal. It means that the proposed limitation on foreign ownership of private security companies cannot enter into force before the completion of the procedures contained in GATS Article XXI. Any Member whose interests may be affected by the intended modification or withdrawal must communicate its claim within 45 days. If no Member submits a claim the modification or withdrawal can be implemented. However, the modifying Member is obliged to negotiate with each affected Member with a view to reach agreement on any necessary compensatory adjustment within 3 months. Compensation must be negotiated in the form of other commitments in other services sectors. The period of negotiating can be extended by mutual agreement. It means that Members cannot withdraw or modify commitments unilaterally. To date, only the USA (regarding modification of measures affecting the cross-border supply of gambling and betting services) and EU (twice regarding enlargement of the EU under GATS Article V) have submitted notifications of intention to modify schedules of commitments. In both cases it took years to negotiate compensatory packages with affected Members. Compensatory adjustments must be made on a most-favoured-nation basis. It means that whatever agreement South Africa reach with any affected Member, the benefits thereof must be extended to all WTO Members.
If the Members cannot reach agreement within the prescribed period of negotiations, an affected Member may submit an arbitration request. In such a case, the modifying Member may not implement any modification or withdrawal until it has received the arbitration body’s findings and is in conformity with those findings. The arbitration body must examine the compensatory adjustments offered by the modifying Member or requested by an affected Member in order to find a “balance of rights and obligations which maintains a general level of mutually advantageous commitments not less favourable to trade than that provided for in Schedules of specific commitments prior to the negotiations” (S/L/80). The comment made by the Minister regarding South Africa’s willingness to negotiate the withdrawal of existing GATS commitments raises pertinent questions precisely because the outcome of the process is so uncertain. What will South Africa be willing to offer security companies from the United Kingdom, USA and elsewhere to compensate them for loss of trade opportunities in the South African private security industry? Given the fact that South Africa has already made substantial liberalisation commitments, in which services sectors will further liberalisation commitments be undertaken? One should anticipate that affected Members will not wait for an offer from South Africa. What concessions will affected Members likely request from South Africa? Will they request foreign participation in, for example, the postal, telecommunication, energy or transport sectors?
GATS Article XXI provides further that if the modifying Member implements its proposed modification or withdrawal and does not comply with the findings of the arbitration, any affected Member that participated in the arbitration may modify or withdraw substantially equivalent benefits in conformity with those findings. In other words, affected Members have the right to retaliate or cross-retaliate by suspending concessions arising under the GATS or other obligations arising under another WTO agreement not in dispute such as those covering trade in goods or intellectual property.
South Africa has the right to modify or withdraw GATS commitments but it will come at a cost. If it was relatively easy to change commitments it would suggest that the GATS framework is flexible to changes in domestic regulatory regimes. Such a situation could only lead to uncertainty and unpredictability in doing business across borders. The overall objective of the GATS is the progressive liberalisation of international trade in services. In particular, GATS Article XIX: provides that “the process of progressive liberalisation shall be advanced in each round” of negotiations “directed towards increasing the general level of specific commitments undertaken by Members”. Therefore, the general direction of trade negotiations is towards increasing, and not decreasing, market access and national treatment on trade in services.
The Department of Trade and Industry, not Police, is responsible for the negotiation of trade agreements, including the GATS. The negotiation of compensatory adjustments may result in the liberalisation of domestic services sectors previously protected from foreign competition. It may also affect the way various government departments administer their areas of responsibility. None of these possible implications is a foregone conclusion. The President can still decide to refer the Bill back to the National Assembly for reconsideration.
WTO, 1999. Council for Trade in Services: Procedures for the Implementation of Article XXI of the General Agreement on Trade in Services (GATS) on 19 July 1999 (S/L/80).