Full Submission Promotion and Protection of Investment Bill of 2015 – 25 August 2015

The IRR's Full Submission Promotion and Protection of Investment Bill of 2015.
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Full Submission Promotion and Protection of Investment Bill of 2015 – 25 August 2015

The IRR's Full Submission Promotion and Protection of Investment Bill of 2015.

South African Institute of Race Relations NPC
Submission to the Portfolio Committee on Trade and Industry
regarding the
Promotion and Protection of Investment Bill of 2015 [B18 -2015]
Johannesburg, 25th August 2015


Introduction
The Portfolio Committee on Trade and Industry (the committee) has invited comment on the Promotion and Protection of Investment Bill of 2015 (the Investment Bill). This submission is made by the South African Institute of Race Relations NPC (IRR), a non-profit organisation formed in 1929 to oppose racial discrimination and promote racial goodwill. Its present objects are to promote democracy, human rights, development, and reconciliation between the peoples of South Africa.

The current Investment Bill is better than its 2013 predecessor in that it omits provisions that sought to empower the State to take property without paying any compensation for it at all. However, the revised Investment Bill is still damaging in many ways and needs to be withdrawn, rather than adopted.
 
According to its Preamble, the Investment Bill “recognises the importance that investment plays in job creation, economic growth, sustainable development, and the well-being of the people of South Africa”. It thus seeks to “promote investment” by creating a facilitating environment and “providing a sound legislative framework for the…protection of all investments, including foreign investments”. [Preamble, Investment Bill]

However, the Investment Bill is unlikely to attain these objectives. In combination with a host of other laws undermining property rights, the Investment Bill is likely to repel, rather than promote, foreign direct investment (FDI). South Africa has a very low savings rate and urgently needs very much more FDI to help fund essential infrastructure, development, and job creation.

Moreover, the country cannot afford to put up any further barriers to direct investment inflows at a time when net FDI has already turned negative. In 2014, outward flows exceeded inward ones by some R13bn while, in the first quarter of 2015, as Business Day records, “inward FDI recorded a negative R22bn…as foreign direct investors in South Africa pulled money out”. [Business Day 24 June 2015]

In addition, the most recent (2015) report by A T Kearney, a global consulting firm, on the world’s 25 most attractive investment destinations saw South Africa drop out of this group altogether. In previous years, the country not only made it into the top 25, but also came in about half way up the index. (In 2014, South Africa was ranked 13th best, while in 2013 it came 15th and in 2012 it was rated in 11th place.)

A spokesman for A T Kearney blames South Africa’s recent exclusion from the index on a lack of “regulatory clarity”. In addition, other emerging markets in the top 25 showed “a willingness to engage in economic reform” and a more “entrepreneurial attitude”.

Undeterred by these developments, the Department of Trade and Industry (DTI) is now pushing for the adoption of this revised Investment Bill. According to the DTI, the Bill seeks to “clarify” and “codify” in South Africa’s domestic legislation “provisions typically found in bilateral investment treaties (BITs)”. In fact, however, the Investment Bill gives foreign investors very much less protection than most bilateral investment treaties provide – which is “prompt, adequate and effective compensation”, along with a right to international arbitration to settle disputes.

Under the Bill, foreign investors will have to refer any dispute they may have with the South African Government to the country’s own courts – the very courts the ruling African National Congress (ANC) has been trying for many years to bring to heel. Though the current Bill makes some provision for international arbitration, it allows this solely on a “state-to-state” basis, so excluding the participation of affected investors. Moreover, international arbitration will be available only with the Government’s “consent”, and only if domestic remedies have been “exhausted” – a process that could take years.

Moreover, instead of “prompt, adequate and effective compensation” – a formula which promises the swift payment of market value at minimum – foreign investors will find their rights on expropriation governed by the Expropriation Bill of 2015 (the Expropriation Bill), now also before Parliament. 

If adopted in its current (and unconstitutional) form, the Expropriation Bill will prevent South Africa’s courts from ruling on the validity of any expropriation. This Bill will also give investors a mere 60 days to sue on the compensation payable, failing which they will be “deemed” to have accepted whatever amount the Government has offered.

In addition, both South African and foreign investors confront not only the Expropriation Bill but also a host of other damaging bills and statutes that:

• significantly undermine property rights (examples include the re-opened land claims process, mooted ceilings on farm sizes, and a further bill aiming to vest all agricultural land in the “custodianship” of the State); and 
• seek to bring about the regulatory or “indirect” expropriation of businesses, for which the Expropriation Bill will seemingly provide no compensation.

Indirect expropriation arises where the State itself does not acquire ownership, but regulation nevertheless deprives owners of many of the usual powers and benefits of ownership. One example is the Private Security Industry Regulation Amendment (PSIRA) Bill of 2012, still to be signed into law, which will require foreign security companies to transfer 51% of their equity to South Africans. Also relevant here are the revised BEE generic codes of good practice, which are already putting great pressure on many firms to transfer 51% of their ownership to BEE investors at heavily discounted prices.

All these laws make for an onerous and shifting policy environment. This, of course, also erodes the regulatory certainty that investors require before they can prudently commit their capital and other resources to this country.

In addition, there are many practical obstacles to doing business in South Africa. Among these are the Eskom debacle; the country’s parlous education system (ranked fourth last in the world); its fractious labour relations (rated worst across the globe); its high input costs and limited competitiveness, its unemployment crisis and resulting social instability; and a public service so inefficient that this in itself has become one of the worst obstacles to doing business here.

Both foreign and local investors thus have good reason to give South Africa a wide berth. In erecting yet another barrier to FDI in the form of the Investment Bill, the DTI seems careless of the enormous hardship that limited investment and low growth are already causing and will continue to generate. This hardship falls most heavily on the 8.4m people now unemployed, who have diminishing prospects of ever finding work in the adverse business environment the Investment Bill (and other state interventions) are helping to bring about.

Background to the Investment Bill
Bilateral investment treaties concluded after 1994

After 1994 the South African Government entered into a number of bilateral investment treaties with some 13 European nations, many of them members of the European Union (EU). These treaties reflect the general principle of international law that expropriation may be implemented solely for public purposes, under due process of law, and on a non-discriminatory basis.  In the event of such expropriation, these treaties guarantee “prompt, adequate and effective compensation” to the investors covered by them. This formulation allows investors, in the event of expropriation, to claim the full market value of the property they have lost. In addition, these treaties give the task of deciding disputes to international arbitrators, rather than domestic courts. This provides investors with an important guarantee of independence in the adjudication of their disputes.  [City Press 3, Business Day 8 November 2013]

Bilateral investment treaties also commonly guarantee investors “fair and equitable” treatment within the countries in which they make their investments. This provision requires host signatory states to act transparently, reasonably, and without ambiguity. The South African Government has nevertheless adopted various statutes – including the Mineral and Petroleum Resources Development Act (MPRDA) of 2002 – that conflict with this obligation. This conflict arises from the ambiguous provisions of these laws, coupled with the largely unfettered discretion they give officials as to how their vague rules should be interpreted and applied. [Peter Leon, ‘What we can learn from the rest of Africa’, politicsweb.co.za, 30 October 2013]

In requiring a transparent and reasonable regulatory framework, the treaties also constrain the imposition of sweeping new state controls over investments previously made. Recent MPRDA amendments (now under parliamentary review), which seek to introduce damaging price and export controls over “designated” and “strategic” minerals, conflict with these protections for foreign mining investors. Says Peter Leon, an expert on mining law and partner at law firm Webber Wentzel: “The notion of ‘fair and equitable treatment’ is guaranteed in the bilateral investment treaties and essentially means that a government must act predictably towards investors. So if the conditions under which an investment was made are changed, then an investor could sue for compensation.” [Business Day 4 November 2013; Leon, ‘What we can learn’; Mineral and Petroleum Resources Development Amendment Bill of 2013]

Further buttressing foreign investor protection is the fact that bilateral investment treaties cannot be changed unilaterally, but only by agreement between the signatory states. By contrast, protections contained in domestic legislation can be amended by national legislatures at any time. Bilateral investment treaties thus help to consolidate and preserve investor protection. This is particularly important in sectors such as mining, where the capital needed to open or expand a mine is often enormous and it generally takes many years before such investments begin to bear fruit. [Leon, ‘What we can learn’]

Important too is the fact that bilateral investment treaties generally remain in force for specified periods and commonly include “sunset” clauses extending their protection, even after termination, to all investments made while they were current. South Africa’s bilateral investment treaty with the United Kingdom, for example, provides that British investors will remain protected for 20 years after the termination of the agreement, provided their investments in South Africa were made before the treaty was ended.  (Similar provisions apply, of course, to South African investors investing in the United Kingdom during the treaty period.)

Bilateral investment treaties thus play a vital part in attracting FDI, but the South African Government is nevertheless intent on terminating the agreements it earlier concluded with some 13 European countries. The Government claims that this will help provide redress for apartheid injustices. However, the more likely effect will be to harm the disadvantaged by choking off new direct investments from European countries that have long been important sources of FDI into South Africa.

The Government may think that reduced FDI from the West can readily be replaced by fresh FDI from China and Russia on equally (if not more) favourable terms, but this will not in fact be easy to secure. At the end of 2013, FDI stock in South Africa from Western countries and Japan stood at more than R1 385bn, as opposed to a mere R59bn from China and very limited inflows from Russia. [South African Reserve Bank, Quarterly Bulletin, June 2015, pp92-95] Moreover, Western and Japanese FDI made up more than 86% of all FDI stock within the country, which then stood at close on R1 600bn. This means that FDI from the West and Japan cannot easily be replaced. In addition, both China and Russia now have worsening economic problems of their own, making it even more unrealistic for South Africa to rely on them to compensate for reduced Western FDI. 

At the same time, the DTI is trying to pull the wool over the eyes of Western investors by claiming that the Investment Bill incorporates and “codifies” the standard provisions found in bilateral investment treaties. This claim is false. The absence of equivalent protections, coupled with the DTI’s misleading assertions, is likely to be particularly damaging to investor confidence and trust. This will further constrain South Africa’s economic growth, limit the creation of new jobs, and make it harder still to overcome the country’s unemployment crisis and attendant economic suffering.

A government review of bilateral investment treaties
In 2007 the DTI began reviewing the terms of many of the bilateral investment treaties it had signed with European nations. Xavier Carim, deputy director for international trade and economic development within the DTI, claimed that these treaties were “very poorly drafted and left wide scope for interpretation”, which meant the “reasonable option” was to terminate them. [Business Day 8 November 2013] Similar criticisms marked the completion of the DTI’s review, which concluded that the treaties were “unequal and exploitative agreements, which prohibited the very policies…needed to fight poverty”. [Leon, ‘What we can learn’] However, these criticisms were rooted in ideology, rather than in reality. They also brushed over the fact that the only policy shifts the investment treaties were likely to constrain were ones calculated to erode property rights, choke off investment, reduce the growth rate, and worsen joblessness and destitution.

Against this background, the DTI nevertheless recommended that existing bilateral investment treaties should be terminated and replaced by domestic legislation. [Leon, ‘What we can learn’; Business Report 18 November 2013] In 2010 the Cabinet accepted the DTI’s recommendations, saying it wanted a new policy framework that would include a suitable investment statute, the termination of “old-generation” bilateral investment treaties, and the development of a “new model” to govern any fresh agreements of this kind. The task of terminating old-generation treaties was given to the Department of International Relations. [Engineering News 21 October 2013] 

During 2012 and 2013, the Government gave notice of its intention to terminate seven of South Africa’s bilateral investment treaties: those with the Belgo-Luxembourg Economic Union, the United Kingdom, Germany, Spain, Switzerland, Austria, and the Netherlands. [City Press 2 August 2015]  The relevant notice periods (12 months in the case of the United Kingdom, German and Swiss treaties, for example) have since expired, so bringing these treaties to an end. However, investments made when they were still in force remain protected during their respective “sunset” periods.

Many of the countries affected by these terminations have long been significant investors in South Africa. At the end of 2013, for example, the United Kingdom, had made direct investments of some R773bn into South Africa’s FDI stock, while equivalent direct investments from the Netherlands amounted to close on R270bn. German companies had directly invested some R76bn, and were employing more than 90 000 people here. Hence, when the Government issued its notice of intention to terminate the German treaty in October 2013, the South African-German Chamber of Commerce and Industry responded that this was likely to “have a negative impact on general investor confidence” among potential German investors in South Africa. [Business Day 28, 29 October 2013; 2014/15 South Africa Survey, p130]  Switzerland, also a major investor in South Africa, expressed similar concerns about the termination of the Swiss agreement, saying: “This in our view is not the kind of measure to keep the confidence and the predictability of the investment framework in a country.” [Business Report 3 November 2013]

Yet these concerns have never been addressed; and will certainly not be ameliorated by the content of the Investment Bill.

Content of the Investment Bill
A limited definition of ‘investments’

An “investment” will be protected under the Investment Bill only if it is a “lawful enterprise”, constituted under South African law, which “commits resources of economic value over a reasonable period of time, in anticipation of profit”. [Section 2, Investment Bill]

This wording excludes most portfolio investments [Business Day 6 August 2015] and all intellectual property rights. Yet portfolio investments play a vital part in helping South Africa fund its generally large budget and current account deficits, and need adequate protection if foreign investors are to have the confidence to keep putting their money here. In addition, the patents and other intellectual property rights of foreign investors often rank high among their key assets and need proper protection too.  This provision is sufficient in itself to differentiate the Investment Bill from most bilateral investment treaties, which generally do protect portfolio investments and intellectual property rights.

Purpose of the Investment Bill
According to the Investment Bill, its purpose is to “promote and protect investment” in a way that “balances the public interest and the rights and obligations of investors”, while also “affirming the Republic’s sovereign right to regulate investment”. [Section 4, Investment Bill]

Coupled with other clauses in the Investment Bill, this provision puts significantly more emphasis on the Government’s regulatory powers than on the legitimate needs of foreign investors for policy certainty and an economic environment conducive to investment. Moreover, while the Constitution defines “the public interest” in fairly narrow terms, as “including the nation’s commitment to land reform, and to reforms to bring about equitable access to all South Africa’s natural resources”, [Section 25(4), Constitution of the Republic of South Africa, 1996] the Investment Bill suggests that the Government is seeking (as under the Expropriation Bill) to give “the public interest” a much wider meaning.

Right of establishment
The Investment Bill makes it clear that neither current foreign investors nor prospective ones have “a right…to establish an investment in South Africa”. [Section 6, Investment Bill] This wording will allow the Government to veto foreign investments in agricultural land or other spheres if it so chooses. Alternatively, this wording would allow the Government to lay down damaging and unduly onerous conditions for investment, on issues such as local procurement and BEE ownership. Yet South Africa is urgently in need of FDI and needs to do all within its power to retain current inflows and attract many more.

National treatment
The Investment Bill states that “foreign investors and their investments must not be treated less favourably than South African investors in like circumstances”. [Section 7, Investment Bill] However, this apparent promise of equal treatment is undermined by various other provisions.

First, this promise is “subject to national legislation” and so can always be trumped by other statutes. [Section 7(1), Investment Bill] Secondly, the Investment Bill has a complicated definition of “like circumstances” which is generally too vague to give foreign investors any clarity. Relevant factors listed here include such broad and uncertain criteria as:

• “the effect of the foreign investment on the Republic”;
• “the aim of any measure relating to foreign investments”;
• “the factors relating to the foreign investor…in relation to the measure concerned”; and
• “the effect on third parties and the local community”.

Also disturbing is a sub-clause stating that foreign investors and their investments will not be entitled to “the benefit…resulting from…domestic laws designed to regulate foreign ownership in respect of a specified sector”. [Section 7(4)(g), Investment Bill] Though the wording used makes little sense, it does suggest that foreign investors can expect little protection from laws such as the Private Security Industry Regulation Amendment (PSIRA) Bill. This Bill, which has already been adopted by Parliament but still needs the President’s assent, will require foreign-owned security companies to transfer 51% of their equity or assets to South Africans. PSIRA could herald the imposition of similar indigenisation requirements in other sectors, while the Investment Bill seems intended to ensure that foreign investors will not be able to object to “indirect” expropriations of this kind.  The mere possibility of this will help deter the FDI South Africa so badly needs.

Security of investment
The Investment Bill states that “the Republic must accord foreign investors and their investments a level of security as may be generally provided to domestic investors, subject to available resources and capacity”. [Section 8, Investment Bill]

This clause shows that, even if “like circumstances” are found to exist under the vague and complex provisions set out in Clause 7, foreign investors may still have no guarantee of equal treatment with domestic ones. Instead, the “level of security” to be provided to them – a concept which is not defined, but could mean the amount of compensation to be paid to them – will also depend on the Government’s “available resources and capacity”. This could prove a significant limitation, as the State’s resources and capacity are steadily being reduced by inefficient governance, anaemic economic growth, limited tax revenues, and rising debt.

Protection of property
The Investment Bill gives all investors, both local and foreign, “the right to property in terms of Section 25 of the Constitution”. [Section 9, Investment Bill] Section 25 is the property clause in the Bill of Rights, and it contains a number of important provisions. Among other things, it bars any “arbitrary” or irrational deprivation of property at the hands of the State. It also lays down various criteria for the expropriation of property, which must be: [Section 25(1), (2), (3), Constitution of the Republic of South Africa, 1996]

• “for public purposes” or “in the public interest”, as defined in the Constitution; and
• accompanied by “just and equitable compensation”, which strikes “an equitable balance” between the public interest and the interests of those affected, and has (in the absence of agreement) been “decided or approved by a court”.

However, the protections in Section 25 are currently being undermined by various statutes and bills and, in particular, by the Expropriation Bill of 2015 currently before Parliament. If adopted in its present form, the Expropriation Bill will apply to property of virtually every kind – from land to mines, factories, shops, homes, and shares – and will ride roughshod over the provisions of Section 25. It will expose all investors to the risk of expropriations which (objectively viewed) are not rational, are not “in the public interest”, and are not accompanied by “just and equitable” compensation. Unless the Expropriation Bill, in particular, is fundamentally recast to take full account of Section 25, this provision in the Investment Bill will not suffice to reassure either domestic or foreign investors that their property rights will be adequately upheld.

In addition, even if the Expropriation Bill is amended to comply with the Constitution, the protections in Section 25 will still be less than those provided by the bilateral investment treaties South Africa is busy terminating. These treaties, as earlier noted, require compensation on expropriation to be “prompt, adequate, and effective”.  This formula requires the payment of market value at minimum, whereas Section 25 of the Constitution allows market value to be reduced by what are often described as the four “discount” factors. These listed factors are the “current use” of the property, the “history of its acquisition and use”, “the purpose of the expropriation”, and the extent to which the State has previously funded the purchase or capital improvement of the property. [Section 25(3), Constitution]

Many of these listed factors are inherently difficult to quantify in monetary terms, which gives state officials great discretion in deciding what value to assign to them in any given case. Investors are thus likely to receive significantly less than the market value of their investments: perhaps only 60% of that value, as some foreign commentators have surmised. This is a major difference from the comprehensive compensation currently available to foreign investors under the bilateral investment treaties.  Comments Sean Woolfrey of the Trade Law Centre of Southern Africa: “From the point of view of foreign investors, a guarantee of full market value compensation is certainly more reassuring than a guarantee of ‘just and equitable’ compensation, the exact determination of which is likely to be less predictable and more open to political influence.” [Business Day 31 October 2013]

In addition, as earlier noted, the Investment Bill allows the “level of security” provided to foreign investors to be reduced in line with the State’s “available resources and capacity”. This could allow the Government – which already confronts large budget and current account deficits – to argue that its resources are too limited for it to pay even 60% of market value to the foreign investors whose properties it has expropriated.

Also important is the timing of compensation payments. Bilateral investment treaties require  “prompt” payment, but the Investment Bill, read together with the Expropriation Bill, could allow the Government to delay payment until well after it has taken ownership and possession of the properties in issue. This prospect is also likely to deter fresh FDI.

Transfer of funds
As Jonathan Lang of Bowman Gilfillan, a law firm, has pointed out, foreign investors need an assurance that they will be able to repatriate both the capital they have invested and the income it has yielded. Such income (generally referred to as “returns” in bilateral investment treaties) includes any “profits, interest, dividends, capital gains, fees, and royalties” that the investor may have garnered.

However, the Investment Bill gives foreign investors no right to repatriate either capital or returns. All it says is that “a foreign investor may, in respect of any investment, transfer funds, subject to taxation and other applicable legislation”. [Section 10, Investment Bill] This provision is too vague and open-ended to give foreign investors the assurances they need; and is likely in itself to become a major impediment to future FDI.

Right to regulate
As earlier noted, bilateral investment treaties generally include guarantees of “fair and equitable” treatment for foreign investors. This provision allows the investors covered by these treaties to seek compensation for vague and damaging regulation (of the kind found in both the MPRDA and the proposed amendments to it) that are in breach of this guarantee.

Whereas most bilateral investment treaties promise “fair and equitable” treatment, the Investment Bill puts its emphasis on the Government’s “right to regulate” in pursuit of various policy objectives. The Investment Bill thus states that, “notwithstanding anything to the contrary” contained within its terms, both the Government and “any organ of state” may “take measures, in accordance with the Constitution and applicable legislation” to:

• “redress historical, social and economic inequalities and injustices”;
• “foster economic development, industrialisation, and beneficiation”;
• “achieve the progressive realisation of socio-economic rights”;
• “protect the environment and the…sustainable use of natural resources”;
• “protect the security interests, including the financial stability”, of the country; and
• “fulfil the Republic’s obligations [as regards] the maintenance…or restoration of international peace and security”.

These provisions are so wide-ranging and open-ended that their full ramifications cannot be predicted.  What is clear, however, is the sweeping mandate they give the Government to adopt the Expropriation Bill and various other measures that will severely limit the property rights of both domestic and foreign investors. These laws are being enacted in the supposed interests of “redress”, but in fact they will hobble the economy and hurt the previously disadvantaged. [Leon, ‘What we can learn’; Mineral and Petroleum Resources Development Amendment Bill of 2013]

Dispute resolution
Under South Africa’s bilateral investment treaties, the power to adjudicate disputes lies with international arbitrators who are unlikely to be swayed by domestic political considerations. By contrast, the Investment Bill requires an aggrieved foreign investor to get the Government to agree that “a dispute has arisen”, and then either: [Sections 1, 12(1), (4), Investment Bill]

• request the DTI (or any other competent authority) to “facilitate the resolution of the dispute by appointing a mediator or other competent body; or
• “approach any competent court, independent tribunal, or statutory body within the Republic” for the resolution of the dispute. 

Only after domestic remedies have been exhausted, may the dispute be referred to international arbitration – and then only if the Government gives its “consent” to such a step. In addition, any such arbitration will take place solely “between the Republic and the home state of the applicable investor”. [Section 12(5), Investment Bill] The Investment Bill thus makes provision only for “a state-to state” form of arbitration, which excludes the participation of the affected investor and requires that investor to persuade his own government to take up his dispute with the South African State.

According to Mr Leon, limiting access to international arbitration in this way is a “retrogressive step”, which is out of line with the global trend towards the internationalisation of investment protection. It also overlooks the fact that international arbitration “provides investors with increased certainty and contributes to investor confidence”.  [Business Day 28 October 2013, 6 August 2015]  Adds Mr Lang of Bowman Gilfillan: “A cornerstone of bilateral investment treaties worldwide is recourse to international arbitration. By taking the process for dispute resolution outside the host nation to an ostensibly neutral tribunal, foreign investors have a greater degree of comfort that they will receive equal treatment and, importantly, privacy.” [Bowman Gilfillan, ‘DTI changes tack on investment treaties’, p2]

According to Rob Davies, minister of trade and industry, foreign investors have no reason for concern about having to rely on South Africa’s courts, which “fare very well in terms of their capacity to enforce contracts”. South Africa is also “a specialised commercial jurisdiction with efficient and well-capacitated legal professionals and an independent Judiciary”, he says. [City Press 3 November 2013] However, though South African courts do generally function well in commercial matters and have a significant degree of institutional independence, the Bench has also been weakened by a number of poor appointments since 1994. These have eroded business confidence in the capacity of the high courts to decide complex commercial cases, while there has always been limited commercial experience within the Constitutional Court. In addition, the ANC’s express intention is to bring the Judiciary under the control of party loyalists, for it sees the courts as a key “lever of state power” which cannot remain autonomous if the “second phase” of its national democratic revolution is successfully to be implemented. 

Moreover, some of the rulings of the Constitutional Court on contentious political or “transformation” issues important to the ANC have clearly been executive-minded. Examples include the court’s judgments on the certification of the 1996 Constitution, the validity of parliamentary “floor-crossing” rules, the meaning of the equality clause, and the validity of regulations imposing price controls on medicines. Particularly relevant here too is the Constitutional Court’s recent ruling (in the Agri-SA case in 2013) that the taking of property by the State as “custodian” for others does not amount to expropriation or warrant the payment of any compensation at all.

The Investment Bill’s alternative option – that foreign investors may ask the DTI or any other authority to refer a dispute to mediation – is also far from satisfactory. This is compounded by the fact that the minister will be able to prescribe both the “criteria for the appointment of a mediator” and “the information…to be submitted by the investor”. [Sections 12(2), (3), Investment Bill] These provisions give the minister a broad discretion over matters which should be set down in the statute, not left to political decision-making on a case-by-case basis.

Transitional arrangements
The current Investment Bill is better than its predecessor in that it no longer seeks retrospective operation. The 2013 bill would have applied to investments “made before or after” its enactment into law, which would have contradicted the rule of law and infringed the “sunset” clauses in the bilateral investment treaties the Government has terminated (or plans still to end). Such clauses are supposed to protect existing investments for specified periods – generally between ten and 20 years – after the termination of the relevant treaties. 

The Investment Bill now confirms that “existing investments that were made under bilateral investment treaties will continue to be protected for the period…stipulated in the treaties”. [Section 14(1), Investment Bill]  Investments “made after the termination of such treaties” will be governed either by “the general South African law” or by its own provisions. [Section 14(2), Investment Bill] Though these provisions are better than earlier ones, they will not suffice to restore investor confidence or encourage fresh FDI.

Damage to the economy
The Investment Bill has major ramifications for both foreign and local investors. In combination with the prior termination of seven European bilateral investment treaties, it sends out a disturbing message to foreign investors about the Government’s willingness to renege on its earlier commitments. This is likely to reduce the FDI the country so badly needs.

In 2013 investment analysts Goldman Sachs reported that South Africa needs some R80bn in foreign direct investment (FDI) every year if it is to raise its annual average rate of economic growth to 5.4%, as the National Development Plan envisages. [Sunday Times 10 November 2013] Yet the country is already battling to attain this level of FDI, and risks a sharp increase in FDI outflows if it remains set on its current course.

Dr Davies has claimed that the country’s new policy framework (based on the termination of the European bilateral investment treaties and the adoption of the Investment Bill) will have no impact on FDI, as “experience over the world shows that [such treaties] are not decisive in decisions to invest or not in any jurisdiction”. In his view, investors care more about whether “they have recourse to justice…under an effective legal system”. [Sunday Times 10 November 2013] Even if this last assertion by Dr Davies is correct, South Africa’s legal system has been sufficiently weakened to erode the trust that foreign investors might earlier have placed in it.

In addition, the European Union (EU) is still South Africa’s biggest trading partner. Moreover, as earlier noted, at the end of 2013, Western countries and Japan had cumulatively contributed some 86% of South Africa’s FDI stock, making them by far the biggest foreign direct investors in this country. [Business Day 18 November 2013; 2014/15 South Africa Survey, pp130, 148] The concerns of these investor nations thus need to be carefully heeded, not brushed aside

In November 2013 the EU’s commissioner for trade, Karel de Gucht, said South Africa’s decision to terminate the treaties was “not the right one and would have an impact on EU investments”. Added Mr de Gucht: “I must reiterate that we are not amused by South Africa on these treaties. The new legislation is not giving the same protection at all. I can hardly imagine it will not impact on investments from the EU. Protection is going down with the intended legislation…[which provides] a standard of protection inferior to the treaties.” [Business Day, The Star 12 November 2013] (This comment was made in the context of the 2013 bill, but is equally applicable to the current Investment Bill.)

Roeland van de Geer, EU ambassador to South Africa, added that Mr de Gucht’s statement had “sprung from a concern that South Africa’s termination of the treaties would weaken its position as a global investment destination”. Said Mr van de Geer: “With South Africa reportedly attracting less than half of the FDI of comparably sized economies, eroding the existing protections that foreign investors enjoy in the country should be carefully, and financially, assessed.” [Business Day 18 November 2013]

Hilary Joffe, deputy editor of Business Day, was more blunt, writing: “If we want to carry on spending more than we earn – so running a large current account deficit – we need foreigners to continue to finance our habit…. But South Africa has not been particularly good at attracting FDI,… [In addition,] the DTI appears to be either ignorant of investors’ concerns or dismissive of them. Either way, it sends a message that the Government is not all that interested in foreign investors. In the present environment, this is not a message that South Africa can afford to send.” [Business Day 12 November 2013]

But the Government seems careless of the damage to the economy it is helping to bring about. Having already introduced a host of dirigiste regulation – from mining law to labour law, employment equity legislation, ever shifting BEE requirements, and the largely failed land reform process – it is now putting FDI at yet further risk through its termination of important bilateral investment treaties and the introduction of this flawed Investment Bill.

The way forward
There are already so many major obstacles to direct investment in South Africa – ranging from the dirigiste regulations outlined above to electricity shortages, labour unrest, high input costs, poor productivity, and logistics bottlenecks [Sunday Times 10 November 2013] – that the country simply cannot afford to add yet another barrier in the form of the Investment Bill.

To restore the confidence of EU and other foreign investors, South Africa needs to scrap the Investment Bill, reinstate the investment treaties it has already terminated, and give all European states, in particular, the assurance that the rest of the country’s bilateral investment treaties will remain in force. In addition, the Expropriation Bill needs to be fundamentally redrafted, so as to bring it into line with the property clause and other relevant provisions of the Constitution.  (The IRR has drafted a revised expropriation bill that meets these needs, and a synopsis of its key parameters is attached, for the committee’s ease of reference, as Appendix 1.)

These steps would give the country a far more realistic chance of meeting the important goals set out in the preamble to the Investment Bill. The DTI is correct in noting the vital role that “investment plays in job creation, economic growth, development, and the well-being of the people of South Africa”. But the necessary investment is unlikely to be forthcoming if the Government continues on its present policy path.

At the very least, the Investment Bill needs to be scrapped, while the Expropriation Bill needs to be recast along the lines the IRR has proposed. Above all, the Government must do all within its power to reassure all potential investors – both direct and portfolio, local and foreign – that it committed to upholding the Constitution, promoting economic growth, and making South Africa a highly attractive and competitive investment destination.

South African Institute of Race Relations NPC    25th August 2015

IRR TV

South African Institute of Race Relations NPC
Submission to the Portfolio Committee on Trade and Industry
regarding the
Promotion and Protection of Investment Bill of 2015 [B18 -2015]
Johannesburg, 25th August 2015


Introduction
The Portfolio Committee on Trade and Industry (the committee) has invited comment on the Promotion and Protection of Investment Bill of 2015 (the Investment Bill). This submission is made by the South African Institute of Race Relations NPC (IRR), a non-profit organisation formed in 1929 to oppose racial discrimination and promote racial goodwill. Its present objects are to promote democracy, human rights, development, and reconciliation between the peoples of South Africa.

The current Investment Bill is better than its 2013 predecessor in that it omits provisions that sought to empower the State to take property without paying any compensation for it at all. However, the revised Investment Bill is still damaging in many ways and needs to be withdrawn, rather than adopted.
 
According to its Preamble, the Investment Bill “recognises the importance that investment plays in job creation, economic growth, sustainable development, and the well-being of the people of South Africa”. It thus seeks to “promote investment” by creating a facilitating environment and “providing a sound legislative framework for the…protection of all investments, including foreign investments”. [Preamble, Investment Bill]

However, the Investment Bill is unlikely to attain these objectives. In combination with a host of other laws undermining property rights, the Investment Bill is likely to repel, rather than promote, foreign direct investment (FDI). South Africa has a very low savings rate and urgently needs very much more FDI to help fund essential infrastructure, development, and job creation.

Moreover, the country cannot afford to put up any further barriers to direct investment inflows at a time when net FDI has already turned negative. In 2014, outward flows exceeded inward ones by some R13bn while, in the first quarter of 2015, as Business Day records, “inward FDI recorded a negative R22bn…as foreign direct investors in South Africa pulled money out”. [Business Day 24 June 2015]

In addition, the most recent (2015) report by A T Kearney, a global consulting firm, on the world’s 25 most attractive investment destinations saw South Africa drop out of this group altogether. In previous years, the country not only made it into the top 25, but also came in about half way up the index. (In 2014, South Africa was ranked 13th best, while in 2013 it came 15th and in 2012 it was rated in 11th place.)

A spokesman for A T Kearney blames South Africa’s recent exclusion from the index on a lack of “regulatory clarity”. In addition, other emerging markets in the top 25 showed “a willingness to engage in economic reform” and a more “entrepreneurial attitude”.

Undeterred by these developments, the Department of Trade and Industry (DTI) is now pushing for the adoption of this revised Investment Bill. According to the DTI, the Bill seeks to “clarify” and “codify” in South Africa’s domestic legislation “provisions typically found in bilateral investment treaties (BITs)”. In fact, however, the Investment Bill gives foreign investors very much less protection than most bilateral investment treaties provide – which is “prompt, adequate and effective compensation”, along with a right to international arbitration to settle disputes.

Under the Bill, foreign investors will have to refer any dispute they may have with the South African Government to the country’s own courts – the very courts the ruling African National Congress (ANC) has been trying for many years to bring to heel. Though the current Bill makes some provision for international arbitration, it allows this solely on a “state-to-state” basis, so excluding the participation of affected investors. Moreover, international arbitration will be available only with the Government’s “consent”, and only if domestic remedies have been “exhausted” – a process that could take years.

Moreover, instead of “prompt, adequate and effective compensation” – a formula which promises the swift payment of market value at minimum – foreign investors will find their rights on expropriation governed by the Expropriation Bill of 2015 (the Expropriation Bill), now also before Parliament. 

If adopted in its current (and unconstitutional) form, the Expropriation Bill will prevent South Africa’s courts from ruling on the validity of any expropriation. This Bill will also give investors a mere 60 days to sue on the compensation payable, failing which they will be “deemed” to have accepted whatever amount the Government has offered.

In addition, both South African and foreign investors confront not only the Expropriation Bill but also a host of other damaging bills and statutes that:

• significantly undermine property rights (examples include the re-opened land claims process, mooted ceilings on farm sizes, and a further bill aiming to vest all agricultural land in the “custodianship” of the State); and 
• seek to bring about the regulatory or “indirect” expropriation of businesses, for which the Expropriation Bill will seemingly provide no compensation.

Indirect expropriation arises where the State itself does not acquire ownership, but regulation nevertheless deprives owners of many of the usual powers and benefits of ownership. One example is the Private Security Industry Regulation Amendment (PSIRA) Bill of 2012, still to be signed into law, which will require foreign security companies to transfer 51% of their equity to South Africans. Also relevant here are the revised BEE generic codes of good practice, which are already putting great pressure on many firms to transfer 51% of their ownership to BEE investors at heavily discounted prices.

All these laws make for an onerous and shifting policy environment. This, of course, also erodes the regulatory certainty that investors require before they can prudently commit their capital and other resources to this country.

In addition, there are many practical obstacles to doing business in South Africa. Among these are the Eskom debacle; the country’s parlous education system (ranked fourth last in the world); its fractious labour relations (rated worst across the globe); its high input costs and limited competitiveness, its unemployment crisis and resulting social instability; and a public service so inefficient that this in itself has become one of the worst obstacles to doing business here.

Both foreign and local investors thus have good reason to give South Africa a wide berth. In erecting yet another barrier to FDI in the form of the Investment Bill, the DTI seems careless of the enormous hardship that limited investment and low growth are already causing and will continue to generate. This hardship falls most heavily on the 8.4m people now unemployed, who have diminishing prospects of ever finding work in the adverse business environment the Investment Bill (and other state interventions) are helping to bring about.

Background to the Investment Bill
Bilateral investment treaties concluded after 1994

After 1994 the South African Government entered into a number of bilateral investment treaties with some 13 European nations, many of them members of the European Union (EU). These treaties reflect the general principle of international law that expropriation may be implemented solely for public purposes, under due process of law, and on a non-discriminatory basis.  In the event of such expropriation, these treaties guarantee “prompt, adequate and effective compensation” to the investors covered by them. This formulation allows investors, in the event of expropriation, to claim the full market value of the property they have lost. In addition, these treaties give the task of deciding disputes to international arbitrators, rather than domestic courts. This provides investors with an important guarantee of independence in the adjudication of their disputes.  [City Press 3, Business Day 8 November 2013]

Bilateral investment treaties also commonly guarantee investors “fair and equitable” treatment within the countries in which they make their investments. This provision requires host signatory states to act transparently, reasonably, and without ambiguity. The South African Government has nevertheless adopted various statutes – including the Mineral and Petroleum Resources Development Act (MPRDA) of 2002 – that conflict with this obligation. This conflict arises from the ambiguous provisions of these laws, coupled with the largely unfettered discretion they give officials as to how their vague rules should be interpreted and applied. [Peter Leon, ‘What we can learn from the rest of Africa’, politicsweb.co.za, 30 October 2013]

In requiring a transparent and reasonable regulatory framework, the treaties also constrain the imposition of sweeping new state controls over investments previously made. Recent MPRDA amendments (now under parliamentary review), which seek to introduce damaging price and export controls over “designated” and “strategic” minerals, conflict with these protections for foreign mining investors. Says Peter Leon, an expert on mining law and partner at law firm Webber Wentzel: “The notion of ‘fair and equitable treatment’ is guaranteed in the bilateral investment treaties and essentially means that a government must act predictably towards investors. So if the conditions under which an investment was made are changed, then an investor could sue for compensation.” [Business Day 4 November 2013; Leon, ‘What we can learn’; Mineral and Petroleum Resources Development Amendment Bill of 2013]

Further buttressing foreign investor protection is the fact that bilateral investment treaties cannot be changed unilaterally, but only by agreement between the signatory states. By contrast, protections contained in domestic legislation can be amended by national legislatures at any time. Bilateral investment treaties thus help to consolidate and preserve investor protection. This is particularly important in sectors such as mining, where the capital needed to open or expand a mine is often enormous and it generally takes many years before such investments begin to bear fruit. [Leon, ‘What we can learn’]

Important too is the fact that bilateral investment treaties generally remain in force for specified periods and commonly include “sunset” clauses extending their protection, even after termination, to all investments made while they were current. South Africa’s bilateral investment treaty with the United Kingdom, for example, provides that British investors will remain protected for 20 years after the termination of the agreement, provided their investments in South Africa were made before the treaty was ended.  (Similar provisions apply, of course, to South African investors investing in the United Kingdom during the treaty period.)

Bilateral investment treaties thus play a vital part in attracting FDI, but the South African Government is nevertheless intent on terminating the agreements it earlier concluded with some 13 European countries. The Government claims that this will help provide redress for apartheid injustices. However, the more likely effect will be to harm the disadvantaged by choking off new direct investments from European countries that have long been important sources of FDI into South Africa.

The Government may think that reduced FDI from the West can readily be replaced by fresh FDI from China and Russia on equally (if not more) favourable terms, but this will not in fact be easy to secure. At the end of 2013, FDI stock in South Africa from Western countries and Japan stood at more than R1 385bn, as opposed to a mere R59bn from China and very limited inflows from Russia. [South African Reserve Bank, Quarterly Bulletin, June 2015, pp92-95] Moreover, Western and Japanese FDI made up more than 86% of all FDI stock within the country, which then stood at close on R1 600bn. This means that FDI from the West and Japan cannot easily be replaced. In addition, both China and Russia now have worsening economic problems of their own, making it even more unrealistic for South Africa to rely on them to compensate for reduced Western FDI. 

At the same time, the DTI is trying to pull the wool over the eyes of Western investors by claiming that the Investment Bill incorporates and “codifies” the standard provisions found in bilateral investment treaties. This claim is false. The absence of equivalent protections, coupled with the DTI’s misleading assertions, is likely to be particularly damaging to investor confidence and trust. This will further constrain South Africa’s economic growth, limit the creation of new jobs, and make it harder still to overcome the country’s unemployment crisis and attendant economic suffering.

A government review of bilateral investment treaties
In 2007 the DTI began reviewing the terms of many of the bilateral investment treaties it had signed with European nations. Xavier Carim, deputy director for international trade and economic development within the DTI, claimed that these treaties were “very poorly drafted and left wide scope for interpretation”, which meant the “reasonable option” was to terminate them. [Business Day 8 November 2013] Similar criticisms marked the completion of the DTI’s review, which concluded that the treaties were “unequal and exploitative agreements, which prohibited the very policies…needed to fight poverty”. [Leon, ‘What we can learn’] However, these criticisms were rooted in ideology, rather than in reality. They also brushed over the fact that the only policy shifts the investment treaties were likely to constrain were ones calculated to erode property rights, choke off investment, reduce the growth rate, and worsen joblessness and destitution.

Against this background, the DTI nevertheless recommended that existing bilateral investment treaties should be terminated and replaced by domestic legislation. [Leon, ‘What we can learn’; Business Report 18 November 2013] In 2010 the Cabinet accepted the DTI’s recommendations, saying it wanted a new policy framework that would include a suitable investment statute, the termination of “old-generation” bilateral investment treaties, and the development of a “new model” to govern any fresh agreements of this kind. The task of terminating old-generation treaties was given to the Department of International Relations. [Engineering News 21 October 2013] 

During 2012 and 2013, the Government gave notice of its intention to terminate seven of South Africa’s bilateral investment treaties: those with the Belgo-Luxembourg Economic Union, the United Kingdom, Germany, Spain, Switzerland, Austria, and the Netherlands. [City Press 2 August 2015]  The relevant notice periods (12 months in the case of the United Kingdom, German and Swiss treaties, for example) have since expired, so bringing these treaties to an end. However, investments made when they were still in force remain protected during their respective “sunset” periods.

Many of the countries affected by these terminations have long been significant investors in South Africa. At the end of 2013, for example, the United Kingdom, had made direct investments of some R773bn into South Africa’s FDI stock, while equivalent direct investments from the Netherlands amounted to close on R270bn. German companies had directly invested some R76bn, and were employing more than 90 000 people here. Hence, when the Government issued its notice of intention to terminate the German treaty in October 2013, the South African-German Chamber of Commerce and Industry responded that this was likely to “have a negative impact on general investor confidence” among potential German investors in South Africa. [Business Day 28, 29 October 2013; 2014/15 South Africa Survey, p130]  Switzerland, also a major investor in South Africa, expressed similar concerns about the termination of the Swiss agreement, saying: “This in our view is not the kind of measure to keep the confidence and the predictability of the investment framework in a country.” [Business Report 3 November 2013]

Yet these concerns have never been addressed; and will certainly not be ameliorated by the content of the Investment Bill.

Content of the Investment Bill
A limited definition of ‘investments’

An “investment” will be protected under the Investment Bill only if it is a “lawful enterprise”, constituted under South African law, which “commits resources of economic value over a reasonable period of time, in anticipation of profit”. [Section 2, Investment Bill]

This wording excludes most portfolio investments [Business Day 6 August 2015] and all intellectual property rights. Yet portfolio investments play a vital part in helping South Africa fund its generally large budget and current account deficits, and need adequate protection if foreign investors are to have the confidence to keep putting their money here. In addition, the patents and other intellectual property rights of foreign investors often rank high among their key assets and need proper protection too.  This provision is sufficient in itself to differentiate the Investment Bill from most bilateral investment treaties, which generally do protect portfolio investments and intellectual property rights.

Purpose of the Investment Bill
According to the Investment Bill, its purpose is to “promote and protect investment” in a way that “balances the public interest and the rights and obligations of investors”, while also “affirming the Republic’s sovereign right to regulate investment”. [Section 4, Investment Bill]

Coupled with other clauses in the Investment Bill, this provision puts significantly more emphasis on the Government’s regulatory powers than on the legitimate needs of foreign investors for policy certainty and an economic environment conducive to investment. Moreover, while the Constitution defines “the public interest” in fairly narrow terms, as “including the nation’s commitment to land reform, and to reforms to bring about equitable access to all South Africa’s natural resources”, [Section 25(4), Constitution of the Republic of South Africa, 1996] the Investment Bill suggests that the Government is seeking (as under the Expropriation Bill) to give “the public interest” a much wider meaning.

Right of establishment
The Investment Bill makes it clear that neither current foreign investors nor prospective ones have “a right…to establish an investment in South Africa”. [Section 6, Investment Bill] This wording will allow the Government to veto foreign investments in agricultural land or other spheres if it so chooses. Alternatively, this wording would allow the Government to lay down damaging and unduly onerous conditions for investment, on issues such as local procurement and BEE ownership. Yet South Africa is urgently in need of FDI and needs to do all within its power to retain current inflows and attract many more.

National treatment
The Investment Bill states that “foreign investors and their investments must not be treated less favourably than South African investors in like circumstances”. [Section 7, Investment Bill] However, this apparent promise of equal treatment is undermined by various other provisions.

First, this promise is “subject to national legislation” and so can always be trumped by other statutes. [Section 7(1), Investment Bill] Secondly, the Investment Bill has a complicated definition of “like circumstances” which is generally too vague to give foreign investors any clarity. Relevant factors listed here include such broad and uncertain criteria as:

• “the effect of the foreign investment on the Republic”;
• “the aim of any measure relating to foreign investments”;
• “the factors relating to the foreign investor…in relation to the measure concerned”; and
• “the effect on third parties and the local community”.

Also disturbing is a sub-clause stating that foreign investors and their investments will not be entitled to “the benefit…resulting from…domestic laws designed to regulate foreign ownership in respect of a specified sector”. [Section 7(4)(g), Investment Bill] Though the wording used makes little sense, it does suggest that foreign investors can expect little protection from laws such as the Private Security Industry Regulation Amendment (PSIRA) Bill. This Bill, which has already been adopted by Parliament but still needs the President’s assent, will require foreign-owned security companies to transfer 51% of their equity or assets to South Africans. PSIRA could herald the imposition of similar indigenisation requirements in other sectors, while the Investment Bill seems intended to ensure that foreign investors will not be able to object to “indirect” expropriations of this kind.  The mere possibility of this will help deter the FDI South Africa so badly needs.

Security of investment
The Investment Bill states that “the Republic must accord foreign investors and their investments a level of security as may be generally provided to domestic investors, subject to available resources and capacity”. [Section 8, Investment Bill]

This clause shows that, even if “like circumstances” are found to exist under the vague and complex provisions set out in Clause 7, foreign investors may still have no guarantee of equal treatment with domestic ones. Instead, the “level of security” to be provided to them – a concept which is not defined, but could mean the amount of compensation to be paid to them – will also depend on the Government’s “available resources and capacity”. This could prove a significant limitation, as the State’s resources and capacity are steadily being reduced by inefficient governance, anaemic economic growth, limited tax revenues, and rising debt.

Protection of property
The Investment Bill gives all investors, both local and foreign, “the right to property in terms of Section 25 of the Constitution”. [Section 9, Investment Bill] Section 25 is the property clause in the Bill of Rights, and it contains a number of important provisions. Among other things, it bars any “arbitrary” or irrational deprivation of property at the hands of the State. It also lays down various criteria for the expropriation of property, which must be: [Section 25(1), (2), (3), Constitution of the Republic of South Africa, 1996]

• “for public purposes” or “in the public interest”, as defined in the Constitution; and
• accompanied by “just and equitable compensation”, which strikes “an equitable balance” between the public interest and the interests of those affected, and has (in the absence of agreement) been “decided or approved by a court”.

However, the protections in Section 25 are currently being undermined by various statutes and bills and, in particular, by the Expropriation Bill of 2015 currently before Parliament. If adopted in its present form, the Expropriation Bill will apply to property of virtually every kind – from land to mines, factories, shops, homes, and shares – and will ride roughshod over the provisions of Section 25. It will expose all investors to the risk of expropriations which (objectively viewed) are not rational, are not “in the public interest”, and are not accompanied by “just and equitable” compensation. Unless the Expropriation Bill, in particular, is fundamentally recast to take full account of Section 25, this provision in the Investment Bill will not suffice to reassure either domestic or foreign investors that their property rights will be adequately upheld.

In addition, even if the Expropriation Bill is amended to comply with the Constitution, the protections in Section 25 will still be less than those provided by the bilateral investment treaties South Africa is busy terminating. These treaties, as earlier noted, require compensation on expropriation to be “prompt, adequate, and effective”.  This formula requires the payment of market value at minimum, whereas Section 25 of the Constitution allows market value to be reduced by what are often described as the four “discount” factors. These listed factors are the “current use” of the property, the “history of its acquisition and use”, “the purpose of the expropriation”, and the extent to which the State has previously funded the purchase or capital improvement of the property. [Section 25(3), Constitution]

Many of these listed factors are inherently difficult to quantify in monetary terms, which gives state officials great discretion in deciding what value to assign to them in any given case. Investors are thus likely to receive significantly less than the market value of their investments: perhaps only 60% of that value, as some foreign commentators have surmised. This is a major difference from the comprehensive compensation currently available to foreign investors under the bilateral investment treaties.  Comments Sean Woolfrey of the Trade Law Centre of Southern Africa: “From the point of view of foreign investors, a guarantee of full market value compensation is certainly more reassuring than a guarantee of ‘just and equitable’ compensation, the exact determination of which is likely to be less predictable and more open to political influence.” [Business Day 31 October 2013]

In addition, as earlier noted, the Investment Bill allows the “level of security” provided to foreign investors to be reduced in line with the State’s “available resources and capacity”. This could allow the Government – which already confronts large budget and current account deficits – to argue that its resources are too limited for it to pay even 60% of market value to the foreign investors whose properties it has expropriated.

Also important is the timing of compensation payments. Bilateral investment treaties require  “prompt” payment, but the Investment Bill, read together with the Expropriation Bill, could allow the Government to delay payment until well after it has taken ownership and possession of the properties in issue. This prospect is also likely to deter fresh FDI.

Transfer of funds
As Jonathan Lang of Bowman Gilfillan, a law firm, has pointed out, foreign investors need an assurance that they will be able to repatriate both the capital they have invested and the income it has yielded. Such income (generally referred to as “returns” in bilateral investment treaties) includes any “profits, interest, dividends, capital gains, fees, and royalties” that the investor may have garnered.

However, the Investment Bill gives foreign investors no right to repatriate either capital or returns. All it says is that “a foreign investor may, in respect of any investment, transfer funds, subject to taxation and other applicable legislation”. [Section 10, Investment Bill] This provision is too vague and open-ended to give foreign investors the assurances they need; and is likely in itself to become a major impediment to future FDI.

Right to regulate
As earlier noted, bilateral investment treaties generally include guarantees of “fair and equitable” treatment for foreign investors. This provision allows the investors covered by these treaties to seek compensation for vague and damaging regulation (of the kind found in both the MPRDA and the proposed amendments to it) that are in breach of this guarantee.

Whereas most bilateral investment treaties promise “fair and equitable” treatment, the Investment Bill puts its emphasis on the Government’s “right to regulate” in pursuit of various policy objectives. The Investment Bill thus states that, “notwithstanding anything to the contrary” contained within its terms, both the Government and “any organ of state” may “take measures, in accordance with the Constitution and applicable legislation” to:

• “redress historical, social and economic inequalities and injustices”;
• “foster economic development, industrialisation, and beneficiation”;
• “achieve the progressive realisation of socio-economic rights”;
• “protect the environment and the…sustainable use of natural resources”;
• “protect the security interests, including the financial stability”, of the country; and
• “fulfil the Republic’s obligations [as regards] the maintenance…or restoration of international peace and security”.

These provisions are so wide-ranging and open-ended that their full ramifications cannot be predicted.  What is clear, however, is the sweeping mandate they give the Government to adopt the Expropriation Bill and various other measures that will severely limit the property rights of both domestic and foreign investors. These laws are being enacted in the supposed interests of “redress”, but in fact they will hobble the economy and hurt the previously disadvantaged. [Leon, ‘What we can learn’; Mineral and Petroleum Resources Development Amendment Bill of 2013]

Dispute resolution
Under South Africa’s bilateral investment treaties, the power to adjudicate disputes lies with international arbitrators who are unlikely to be swayed by domestic political considerations. By contrast, the Investment Bill requires an aggrieved foreign investor to get the Government to agree that “a dispute has arisen”, and then either: [Sections 1, 12(1), (4), Investment Bill]

• request the DTI (or any other competent authority) to “facilitate the resolution of the dispute by appointing a mediator or other competent body; or
• “approach any competent court, independent tribunal, or statutory body within the Republic” for the resolution of the dispute. 

Only after domestic remedies have been exhausted, may the dispute be referred to international arbitration – and then only if the Government gives its “consent” to such a step. In addition, any such arbitration will take place solely “between the Republic and the home state of the applicable investor”. [Section 12(5), Investment Bill] The Investment Bill thus makes provision only for “a state-to state” form of arbitration, which excludes the participation of the affected investor and requires that investor to persuade his own government to take up his dispute with the South African State.

According to Mr Leon, limiting access to international arbitration in this way is a “retrogressive step”, which is out of line with the global trend towards the internationalisation of investment protection. It also overlooks the fact that international arbitration “provides investors with increased certainty and contributes to investor confidence”.  [Business Day 28 October 2013, 6 August 2015]  Adds Mr Lang of Bowman Gilfillan: “A cornerstone of bilateral investment treaties worldwide is recourse to international arbitration. By taking the process for dispute resolution outside the host nation to an ostensibly neutral tribunal, foreign investors have a greater degree of comfort that they will receive equal treatment and, importantly, privacy.” [Bowman Gilfillan, ‘DTI changes tack on investment treaties’, p2]

According to Rob Davies, minister of trade and industry, foreign investors have no reason for concern about having to rely on South Africa’s courts, which “fare very well in terms of their capacity to enforce contracts”. South Africa is also “a specialised commercial jurisdiction with efficient and well-capacitated legal professionals and an independent Judiciary”, he says. [City Press 3 November 2013] However, though South African courts do generally function well in commercial matters and have a significant degree of institutional independence, the Bench has also been weakened by a number of poor appointments since 1994. These have eroded business confidence in the capacity of the high courts to decide complex commercial cases, while there has always been limited commercial experience within the Constitutional Court. In addition, the ANC’s express intention is to bring the Judiciary under the control of party loyalists, for it sees the courts as a key “lever of state power” which cannot remain autonomous if the “second phase” of its national democratic revolution is successfully to be implemented. 

Moreover, some of the rulings of the Constitutional Court on contentious political or “transformation” issues important to the ANC have clearly been executive-minded. Examples include the court’s judgments on the certification of the 1996 Constitution, the validity of parliamentary “floor-crossing” rules, the meaning of the equality clause, and the validity of regulations imposing price controls on medicines. Particularly relevant here too is the Constitutional Court’s recent ruling (in the Agri-SA case in 2013) that the taking of property by the State as “custodian” for others does not amount to expropriation or warrant the payment of any compensation at all.

The Investment Bill’s alternative option – that foreign investors may ask the DTI or any other authority to refer a dispute to mediation – is also far from satisfactory. This is compounded by the fact that the minister will be able to prescribe both the “criteria for the appointment of a mediator” and “the information…to be submitted by the investor”. [Sections 12(2), (3), Investment Bill] These provisions give the minister a broad discretion over matters which should be set down in the statute, not left to political decision-making on a case-by-case basis.

Transitional arrangements
The current Investment Bill is better than its predecessor in that it no longer seeks retrospective operation. The 2013 bill would have applied to investments “made before or after” its enactment into law, which would have contradicted the rule of law and infringed the “sunset” clauses in the bilateral investment treaties the Government has terminated (or plans still to end). Such clauses are supposed to protect existing investments for specified periods – generally between ten and 20 years – after the termination of the relevant treaties. 

The Investment Bill now confirms that “existing investments that were made under bilateral investment treaties will continue to be protected for the period…stipulated in the treaties”. [Section 14(1), Investment Bill]  Investments “made after the termination of such treaties” will be governed either by “the general South African law” or by its own provisions. [Section 14(2), Investment Bill] Though these provisions are better than earlier ones, they will not suffice to restore investor confidence or encourage fresh FDI.

Damage to the economy
The Investment Bill has major ramifications for both foreign and local investors. In combination with the prior termination of seven European bilateral investment treaties, it sends out a disturbing message to foreign investors about the Government’s willingness to renege on its earlier commitments. This is likely to reduce the FDI the country so badly needs.

In 2013 investment analysts Goldman Sachs reported that South Africa needs some R80bn in foreign direct investment (FDI) every year if it is to raise its annual average rate of economic growth to 5.4%, as the National Development Plan envisages. [Sunday Times 10 November 2013] Yet the country is already battling to attain this level of FDI, and risks a sharp increase in FDI outflows if it remains set on its current course.

Dr Davies has claimed that the country’s new policy framework (based on the termination of the European bilateral investment treaties and the adoption of the Investment Bill) will have no impact on FDI, as “experience over the world shows that [such treaties] are not decisive in decisions to invest or not in any jurisdiction”. In his view, investors care more about whether “they have recourse to justice…under an effective legal system”. [Sunday Times 10 November 2013] Even if this last assertion by Dr Davies is correct, South Africa’s legal system has been sufficiently weakened to erode the trust that foreign investors might earlier have placed in it.

In addition, the European Union (EU) is still South Africa’s biggest trading partner. Moreover, as earlier noted, at the end of 2013, Western countries and Japan had cumulatively contributed some 86% of South Africa’s FDI stock, making them by far the biggest foreign direct investors in this country. [Business Day 18 November 2013; 2014/15 South Africa Survey, pp130, 148] The concerns of these investor nations thus need to be carefully heeded, not brushed aside

In November 2013 the EU’s commissioner for trade, Karel de Gucht, said South Africa’s decision to terminate the treaties was “not the right one and would have an impact on EU investments”. Added Mr de Gucht: “I must reiterate that we are not amused by South Africa on these treaties. The new legislation is not giving the same protection at all. I can hardly imagine it will not impact on investments from the EU. Protection is going down with the intended legislation…[which provides] a standard of protection inferior to the treaties.” [Business Day, The Star 12 November 2013] (This comment was made in the context of the 2013 bill, but is equally applicable to the current Investment Bill.)

Roeland van de Geer, EU ambassador to South Africa, added that Mr de Gucht’s statement had “sprung from a concern that South Africa’s termination of the treaties would weaken its position as a global investment destination”. Said Mr van de Geer: “With South Africa reportedly attracting less than half of the FDI of comparably sized economies, eroding the existing protections that foreign investors enjoy in the country should be carefully, and financially, assessed.” [Business Day 18 November 2013]

Hilary Joffe, deputy editor of Business Day, was more blunt, writing: “If we want to carry on spending more than we earn – so running a large current account deficit – we need foreigners to continue to finance our habit…. But South Africa has not been particularly good at attracting FDI,… [In addition,] the DTI appears to be either ignorant of investors’ concerns or dismissive of them. Either way, it sends a message that the Government is not all that interested in foreign investors. In the present environment, this is not a message that South Africa can afford to send.” [Business Day 12 November 2013]

But the Government seems careless of the damage to the economy it is helping to bring about. Having already introduced a host of dirigiste regulation – from mining law to labour law, employment equity legislation, ever shifting BEE requirements, and the largely failed land reform process – it is now putting FDI at yet further risk through its termination of important bilateral investment treaties and the introduction of this flawed Investment Bill.

The way forward
There are already so many major obstacles to direct investment in South Africa – ranging from the dirigiste regulations outlined above to electricity shortages, labour unrest, high input costs, poor productivity, and logistics bottlenecks [Sunday Times 10 November 2013] – that the country simply cannot afford to add yet another barrier in the form of the Investment Bill.

To restore the confidence of EU and other foreign investors, South Africa needs to scrap the Investment Bill, reinstate the investment treaties it has already terminated, and give all European states, in particular, the assurance that the rest of the country’s bilateral investment treaties will remain in force. In addition, the Expropriation Bill needs to be fundamentally redrafted, so as to bring it into line with the property clause and other relevant provisions of the Constitution.  (The IRR has drafted a revised expropriation bill that meets these needs, and a synopsis of its key parameters is attached, for the committee’s ease of reference, as Appendix 1.)

These steps would give the country a far more realistic chance of meeting the important goals set out in the preamble to the Investment Bill. The DTI is correct in noting the vital role that “investment plays in job creation, economic growth, development, and the well-being of the people of South Africa”. But the necessary investment is unlikely to be forthcoming if the Government continues on its present policy path.

At the very least, the Investment Bill needs to be scrapped, while the Expropriation Bill needs to be recast along the lines the IRR has proposed. Above all, the Government must do all within its power to reassure all potential investors – both direct and portfolio, local and foreign – that it committed to upholding the Constitution, promoting economic growth, and making South Africa a highly attractive and competitive investment destination.

South African Institute of Race Relations NPC    25th August 2015

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