Investment Protection Agreements: The Implications of South African Policy and Legislative Changes
In a new tralac Working Paper, Gerhard Erasmus, tralac Associate, discusses the investment protection debate in South Africa and related developments within a broader international trade, development and regional context. The additional aim is to clarify some of the technical aspects of the proposed legislation.
The recent decision by the South African government to withdraw from certain Bilateral Investment Treaties (BITs) and to propose, in the place thereof, national legislation in the form of the Promotion and Protection of Investment Bill, has triggered a wide-ranging debate and some strong criticism. The government does not dispute the need for legal certainty for investors; but has opted for a new approach as to how and where protection will be available. This has become necessary in order to regain the policy space which it maintains is necessary in order to regulate investments in the public interest.
Not everyone is convinced that the Bill offers enough protection to investors or that this has been a wise decision. And not all the criticism is about how future investment disputes will be settled. The Democratic Alliance, the main opposition party, is for example of the view that the Bill provides insufficient security for foreign investors against future arbitrary actions by the state. It is claimed that this Bill lacks certainty and transparency.
South Africa apparently had BITs with 47 trading partners until it cancelled some of them, including those with its biggest EU trading partners and with Switzerland. Existing investments that were made under Bilateral Investment Treaties will continue to be protected for the period and terms stipulated in these treaties. Investments made after the termination of such treaties, but before promulgation of the Act, will be governed by the general South African law.
Others are of the view the Bill will act as a disincentive for sorely needed foreign investment. Their concern is that multinationals will seek alternative locations for their African operations; coming at a time when the US government is for example promoting investment opportunities on the continent. They are also worried about the lack of an explicit guarantee that foreign investors would be able to repatriate their capital and income from their investments, and that such investors are not given the same treatment as local investors. This Bill would “remove or weaken the guarantees of fair and equitable treatment, non-discrimination and market value compensation for expropriation”, among other things.
In future investment disputes will be heard and decided by domestic courts. They will have jurisdiction over investment related disputes; including investments made by foreigners. International arbitration would only be possible on a state-to-state basis and with the consent of the government, and only once domestic remedies have been exhausted. On this score the Bill is said to be inconsistent with the Southern African Development Community (SADC) Protocol on Finance and Investment, which South Africa has ratified. South Africa’s new approach has also been criticised for not being aligned with treatment given to its BRIC (Brazil, Russia, India and China) partners, which are offered greater investor protection.
Certain sections in the Bill are claimed to be vague; action in terms thereof could be unpredictable. The Executive Director of the American Chamber of Commerce in South Africa for example told Members of Parliament that the Bill did not guarantee fair and equitable treatment for investors. The signal to foreign investors is that they will in future enjoy less protection.
The South African government denies these allegations. “The intention of the Department is to clarify provisions typically found in Bilateral Investment Treaties (‘‘BITs’’), by codifying them in the Bill and ensuring compliance with the Constitution.” It maintains that the proposed legislation is a well-balanced legal instrument and in line with international trends.
The South African government has agreed to re-visit some of the issues raised, but all indications are that it will not budge on the right to settle disputes through the system now being proposed. This is a crucial aspect of the Bill; investment related disputes will be settled by South African courts. Only once the domestic remedies have been exhausted will state-to-state arbitration become a possibility, albeit a rather remote one. Investor-state dispute settlement will not be possible.
The proposed investment dispensation seems to be part of a new thinking and a new approach to local ownership concerns. The manner in which South Africa’s Black Economic Empowerment (BEE) measures will impact on foreign investment is an example. The Bill provides that domestic legislation will regulate foreign ownership in respect of specified sectors. This will include BEE ownership targets.
Another new legislative measure, the Private Security Industry Regulation Amendment Bill, provides that foreign ownership of local security companies will be limited to 49%. This has evoked negative responses from politicians and lobbyists in the USA in particular, where South African restrictions on the importation of American products and the implications for South African exports under AGOA are presently under review. Washington is also unhappy about the fact that the recently concluded SADC Economic Partnership Agreement will grant preferential treatment for products from EU member states which American exporters to the SACU region do not enjoy. The ruling party, the ANC, has recently reaffirmed its intention of replacing the “willing buyer, willing seller” land redistribution policy.