Submission to the DTI regarding the Promotion and Protection of Investment Bill of 2013 – 31 January 2014

The IRR's submission to the Department of Trade and Industry regarding the Promotion and Protection of Investment Bill of 2013.
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Submission to the DTI regarding the Promotion and Protection of Investment Bill of 2013 – 31 January 2014

The IRR's submission to the Department of Trade and Industry regarding the Promotion and Protection of Investment Bill of 2013.

South African Institute of Race Relations NPC
Submission to the Department of Trade and Industry
regarding the
Promotion and Protection of Investment Bill of 2013
Johannesburg, 31st January 2014


Introduction
The Department of Trade and Industry (DTI) has invited comment on the Promotion and Protection of Investment Bill of 2013 (the Investment Bill). According to the Preamble, the Investment Bill ‘recognises the importance [of] investment…in job creation, economic growth, development, and the well-being of the people of South Africa’. It thus seeks to ‘promote investment’ and ‘provide a sound legislative framework for the…protection of all investments, including foreign ones’. [Preamble, Investment Bill]

However, the Investment Bill is unlikely to attain any of these objectives. In combination with the Government’s intention to terminate a number of bilateral investment treaties with European states, the Investment Bill is likely to repel, rather than promote, foreign direct investment. It will also erode the property rights of all local investors, making it harder still for the country to raise its annual rate of economic growth or generate the new jobs needed by 8 million unemployed South Africans.

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 investors ‘prompt, adequate and effective compensation’, thus entitling them to the full market value of their property. In addition, these treaties give the task of deciding the amount of compensation payable to international arbitrators, rather than domestic courts. This provides investors with an important guarantee of independence in the adjudication of their claims. [City Press 3, Business Day 8 November 2013]

The treaties also commonly guarantee foreign investors ‘fair and equitable’ treatment, thus requiring the State to act transparently, reasonably, and without ambiguity. However, the South African Government has failed to uphold this obligation. Instead, it has adopted various statutes – including the Mineral and Petroleum Resources Development Act (MPRDA) of 2002 – which contain a number of ambiguous provisions and give officials a largely unfettered discretion as to how these are to be interpreted and applied. [Peter Leon, ‘What we can learn from the rest of Africa’, politicsweb.co.za, 30 October 2013]

In requiring a predictable regulatory framework, the treaties also constrain the imposition of new state controls over investments previously made. This means, for example, that recent proposed amendments to the MPRDA, which would allow the introduction of price and export controls on ‘designated’ and ‘strategic’ minerals, could conflict with the protections given to foreign mining companies under these agreements. Says Peter Leon, an expert on mining law: ‘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]

Moreover, while domestic legislation can be amended by Parliament at any time, the terms of bilateral investment treaties cannot be changed unilaterally, but only by agreement between the signatory states. This consolidates investor protection – and 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’]

However, bilateral investment treaties generally remain in force for specified periods, and often include clauses providing for their automatic renewal or for their termination in accordance with relevant notice provisions. The Government is currently taking advantage of such provisions to bring an end to some 13 bilateral investment treaties it earlier concluded with European countries.

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. According to Xavier Carim, deputy director for international trade and economic development within the DTI, these treaties were ‘very poorly drafted and left wide scope for interpretation’. Hence, the ‘reasonable option’ was to terminate these agreements. [Business Day 8 November 2013]

Reporting on its review in 2009, the DTI described these treaties as ‘unequal and exploitative agreements, which prohibited the very policies…needed to fight poverty’. These agreements also allowed the private sector to challenge regulatory changes which the Government saw as being in the public interest. [Leon, ‘What we can learn’]

The DTI thus recommended that existing bilateral investment treaties be restructured. It also suggested that domestic legislation might replace these agreements, as this would allow protection for investors to be balanced against the country’s developmental and transformation needs. [Leon, ‘What we can learn’; Business Report 18 November 2013]

Much of the impetus for this critical review – along with the conclusions reached by the DTI – came from the Graniti case, in which several Italians and a Luxembourg-based company, which together controlled much of South Africa’s granite industry, filed a claim for $266m in compensation for the expropriation of their old-order mining rights under the MPRDA. The case was brought under South Africa’s bilateral investment treaties with Italy and the Belgo-Luxembourg Economic Union, both of which provide for disputes to be settled via international arbitration before the International Centre for Settlement of Investment Disputes, an arm of the World Bank. [Business Day 28 July 2009, Business Report 5 November 2013; Piero Foresti, Laura de Carli and others v The Republic of South Africa, ICSID Case no ARB(AF)/07/01]

The Graniti claim (except for the question of costs) was settled in 2010 before it came to arbitration. Under this settlement, as Mr Leon notes, the Government agreed that the claimants need not meet the usual 26% black economic empowerment (BEE) ownership requirement, as set out in the MPRDA and its accompanying mining charter. Instead, they could limit black ownership to 5%. Moreover, instead of having to transfer 5% of equity or assets to black investors, the Government further agreed that they could set off the value of their local beneficiation activities against their obligation to increase black ownership to 5%. This marked a significant victory for the claimants, as no other mining company (in Mr Leon’s words) was ‘treated so generously or…allowed to offset its beneficiation activities against the charter’s ownership requirements’. [Business Day 28 July 2009, 8 November 2013]

Against this background, the director general of trade and industry, Lionel October, concluded that the key problem with ‘the badly drafted treaties’ was that they allowed ‘the legal and business community to challenge regulatory changes the Government considerd to be in the public interest’. This meant that the treaties were ‘open to abuse by parties opposed to government policies such as the MPRDA’. [Business Day 31 October 2013]

This problem has also been highlighted by Joseph Stiglitz, a professor of economics at Columbia University (and also a former senior vice president and chief economist at the World Bank), who criticises investment treaties. Such agreements, he says, have been used to ‘challenge government actions, from debt restructuring to affirmative action’. Worse still, ‘investment agreements enable companies to sue governments over perfectly sensible and just regulatory changes’, such as anti-smoking laws. Moreover, ‘in South Africa, a company could sue if it believes its bottom line might be harmed by programmes designed to address the legacy of official racism’. [Business Day 7 November 2013]

In 2010 the Cabinet thus accepted the DTI’s recommendations. It decided on a new policy framework that would include the drafting and adoption of a suitable investment statute, along with the termination of existing ‘old-generation’ bilateral investment treaties and the development of a ‘new model’ to govern such agreements. The task of terminating old-generation treaties was given to the Department of International Relations. [Engineering News 21 October 2013] 

The termination process
In 2012 the Government gave notice of its intention to terminate one of the investment treaties (that with the Belgo-Luxembourg Economic Union), under which the Graniti case had been lodged. Thereafter, termination notices were served on Spain and the Netherlands. According to Mustaqeem de Gama, director of international trade and investment in the DTI, these treaties were dealt with first because they contained ‘automatic renewal clauses and therefore would have been extended had they not been terminated in time’. [Engineering News 21 October 2013]

In October 2013, South Africa also served a termination notice on Germany, a country which has long been one of its largest foreign investors. Moreover, as Business Day reported, German companies employ more than 90 000 people in South Africa and have cumulatively invested more than R80bn here.  The South African-German Chamber of Commerce and Industry warned that the termination of the treaty was likely to ‘have a negative impact on general investor confidence’ in South Africa. [Business Day 28, 29 October 2013]

In the same month, the Government also gave notice of its intention to terminate its bilateral investment treaty with Switzerland, another major investor in South Africa with R27.4bn of direct investment in this country in 2011 alone. Responded Henrich Maurer, deputy head of the Swiss mission in South Africa: ‘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]

The Government now plans to terminate its bilateral investment treaties with other European states, and to replace the extensive guarantees provided for investors under these agreements with the far more limited protections set out in the Investment Bill.

Reasons for the Investment Bill
The Investment Bill is a vital part of the new regulatory framework endorsed by the Cabinet in 2010. According to the minister of trade and industry, Rob Davies, the Investment Bill will ‘create a comprehensive and uniform legal framework’ for both foreign and local investors. It will thus also address the concerns of domestic investors who (in the words of Dr de Gama) ‘believe that foreign investors have been given unfair advantages in the past’. [Engineering News 21 October 2013]

As Dr de Gama implicitly acknowledges, the Investment Bill reduces the protections that foreign investors now enjoy. According to Jonathan Lang of Bowman Gilfillan, a law firm, the real reason for its introduction is that the Government is trying to ‘protect itself against claims by foreign investors that BEE legislation and the MPRDA, for example, may amount to indirect expropriation of property’. [Bowman Gilfillan, ‘DTI changes tack on bilateral investment treaties’, 14 November 2013, p2]

Mr Leon echoes this view, saying that proposed amendments to the MPRDA (as outlined above) might violate the country’s bilateral investment treaties, along with the protection against arbitrary deprivation of property under Section 25 (the property clause) of the Constitution. Hence, the termination of the treaties and introduction of the Investment Bill have less to do with ‘modernising and updating our investment protection regime’, as Dr Davies states, [Mail & Guardian 27 September 2013] than with avoiding liability under the agreements the country earlier signed.

Content of the Investment Bill
A broad definition of ‘investments’
The Investment Bill defines ‘investments’ as including companies, shares, land, and movable property, along with patents and other intellectual property rights. Also included are mining rights and other ‘licences, authorisations, or permits…to carry out economic and commercial activities’. However, to qualify for protection, an investment must be used for commercial purposes. It must also be ‘a material economic’ one, or have a ‘significant underlying physical presence in the Republic’ in the form of ‘operational facilities’, for instance. [Sections 4, 1, Investment Bill]

‘Principles regarding expropriation’
The Investment Bill provides some protection against expropriation by stating that ‘an investment cannot be expropriated except in accordance with the Constitution and in terms of a law of general application for public purposes or in the public interest, under due process of law’. [Section 8(1), Investment Bill]

The Investment Bill thus echoes the Constitution in allowing expropriation not only ‘for public purposes’ but also ‘in the public interest’. However, 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] The Investment Bill, by contrast, suggests that expropriation may be used in more wide-ranging circumstances.

By contrast, the relevant investment treaties allow expropriation solely ‘for public purposes’, such as the building of a new dam or road. The Investment Bill not only disregards this constraint, but also seeks to narrow the meaning of expropriation by baldly asserting that a number of state actions ‘do not amount to acts of expropriation’ at all.

Narrowing the meaning of expropriation
Section 8 of the Investment Bill attempts to narrow the meaning of expropriation by stating that ‘the following acts, which are not limited [to the list provided], do not amount to acts of expropriation’. Among the actions listed are: [Section 8(2), Investment Bill]
• ‘measures aimed at protecting or enhancing legitimate public welfare objectives, such as public health…or state security’;
• the ‘revocation or limitation…of intellectual property rights’ to the extent that this is ‘consistent with applicable international agreements’; and
• ‘measures which result in the deprivation of property but where the State does not acquire ownership of such property’, provided that ‘there is no permanent destruction of the economic value of the investment’ or ‘the investor’s ability to…use or control his investment is not unduly impeded’.

This last provision seems to be intended to cover the loss of ‘old-order’ mining rights under the MPRDA. If such rights are not converted into ‘new-order’ mining licences within the time periods laid down in the MPRDA, they ‘cease to exist’ under the provisions of that statute. According to the Constitutional Court in a recent case brought by Agri-SA, the principal voice of organised agriculture, the holder of an old-order right which ends in this way is thereby deprived of his earlier right. However, he does not suffer an expropriation because the State does not acquire ownership of the right he has lost, but rather takes his right as custodian for others. In addition, the former owner is able to apply for a new-order mining licence which, if granted, will allow him to continue exploiting (or, in the words of the Investment Bill, ‘using and controlling’) the minerals in question. [Agri South Africa v Minister for Minerals and Energy, Case CCT51/12, judgment of the Constitutional Court of South Africa, 18 April 2013]

Overall, this provision in the Investment Bill is so wide-ranging that its full ambit is difficult to foresee. At minimum, it seems to be intended to prevent any repetition of the Graniti litigation, while giving the State the power to curtail the intellectual property rights of pharmaceutical companies, or justify new legislation requiring 51% local ownership for foreign security companies operating within the country. However, the provision also has further important ramifications, as described in Risks to local investors, below.

The Government’s ‘sovereign rights’
As earlier noted, the bilateral investment treaties now being cancelled include guarantees of ‘fair and equitable’ treatment for foreign investors, thus empowering them to seek compensation for regulatory changes – such as those in the MPRDA and the proposed amendments to it – that reduce the value of their investments.

To counter any such constraint on regulatory change, the Investment Bill asserts the Government’s ‘sovereign right’ to pursue various policy objectives, and indicates that this right cannot be impeded by protections for investors. The Investment Bill thus states that both the Government and ‘any organ of State’ may ‘take measures, in accordance with the Constitution’ to:

• ‘redress historical, social and economic inequalities’;
• foster economic development, industrialisation, and beneficiation’;
• ‘achieve the progressive realisation of socio-economic rights’; and
• ‘protect the essential security interests, including…[the] financial stability’, of the country.

Again, these provisions are so wide-ranging and open-ended that their ramifications are hard to assess. However, they clearly seem intended to provide a legal justification, among other things, for other proposed amendments to the MPRDA which will give the mining minister the power to stipulate what percentages of minerals must be set aside for local beneficiation, and what prices may be charged for these percentages. The introduction of such additional state controls is inconsistent with the investment treaties South Africa has signed, but the Investment Bill seeks simply to brush this obstacle aside. [Leon, ‘What we can learn’; Mineral and Petroleum Resources Development Amendment Bill of 2013]

Compensation on expropriation
Under the bilateral investment treaties South Africa is in the process of terminating, compensation for expropriation must be ‘prompt, adequate, and effective’. Under the Investment Bill, by contrast, compensation is likely to be less than full market value.

According to the Investment Bill, the compensation payable on expropriation must ‘reflect an equitable balance between the public interest and the interests of those affected, having regard to all relevant circumstances’. The relevant factors it lists include not only ‘the market value of the investment’ but also its ‘current use’, the ‘history of its acquisition and use’, and ‘the purpose of the expropriation’. [Section 8(3), Investment Bill]

Though this provision echoes the property clause in the Constitution, it also means that investors are likely to receive significantly less than the market value of their investments (and perhaps only 60% of that value, as some commentators surmise). This is a major change from the comprehensive compensation currently available to investors under both the bilateral investment treaties and the country’s Expropriation Act of 1975 (see Risks to local investors, below).  Adds 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]

Limits on protection for foreign investors
Other provisions of the Investment Bill limit the protection available to foreign investors in three ways:

Compliance with domestic legislation
According to the Investment Bill, ‘the protection of foreign investment is subject to compliance with applicable domestic legislation’. [Section 5(2), Investment Bill] If such a clause had been in force at the time of the Graniti case, it would have been difficult for the claimants to obtain any redress without first demonstrating their compliance with the MPRDA and its accompanying Mining Charter. Moreover, now that the largely aspirational targets in the initial mining charter have been turned into hard numerical quotas under the revised Mining Charter of 2010, this clause could be particularly effective in inhibiting access to redress.

Moreover, beyond the mining sector, the same considerations will apply to other foreign investors subject to the unrealistic BEE targets contained either in the generic codes of good practice or the various sector codes gazetted by the DTI.

‘Security of investment’
According to the Investment Bill, ‘the Republic must accord foreign investors…[an] equal level of security as may be generally provided to other investors and subject to available resources and capacity’. [Section 7(1), Investment Bill]

This clause, though poorly drafted, suggests that the amount of compensation payable will depend not only on market value and the three ‘discount’ factors set out above, but also on the ‘resources’ available to the Government. This could allow South Africa – which already has large budget and current account deficits – to argue that its resources are too limited for it to pay even 60% of market value to foreign investors whose property has been expropriated in the public interest.

‘Like circumstances’
The Investment Bill further provides that the Government must treat foreign investors ‘not less favourably than it treats South African investors in their business operations that are in like circumstances’. [Section 6(1), Investment Bill]

This clause is again vaguely worded, while the Investment Bill’s further explanation of ‘like circumstances’ is also difficult to understand. All that this provision makes clear is that ‘an overall examination on a case-by-case basis of all the terms of a foreign investment’ will be required. [Section 6(4), Investment Bill] However, some commentators are concerned that these provisions could bar foreign investors from protection if such investors have not performed comparatively with domestic investors on issues such as job creation, local procurement, BEE ownership transactions, and the like. 

Timing of compensation
Under South Africa’s bilateral investment treaties, payment must be ‘prompt’ as well as ‘adequate’ and ‘effective’. This formulation has a well-established meaning, requiring that payment be immediate rather than delayed. The Investment Bill, by contrast, merely states that ‘just and equitable compensation must be effected in a timely manner’. [Section 8(1), Investment Bill]

Adjudication of disputes
South Africa’s bilateral investment treaties give the power to adjudicate disputes to international arbitrators unlikely to be swayed by domestic political considerations. By contrast, the Investment Bill requires an aggrieved foreign investor to seek ‘a review by a competent [South African] court’ (or refer the matter to the domestic dispute resolution procedures outlined below). [Business Day 31 October 2013; Sections 8(5), Investment Bill]

According to Professor Stiglitz, the international arbitration for which investment treaties provide has proved to be ‘arbitrary and capricious, with no systemic way to reconcile incompatible rulings issued by different panels’. This has not only increased uncertainty, but also subjected many governments to ‘enormous payouts’ and exorbitant legal costs. [Business Day 7 November 2013] The implication is that domestic courts would generally do better in adjudicating disputes, but many countries do not have local courts that are sufficiently independent, efficient, or reliable. [Business Day 31 October 2013]

The removal of international arbitration under the Investment Bill, writes Mr Leon, is a ‘retrogressive step’. It is also out of line with international best practice, as international arbitration ‘provides investors with increased certainty and contributes to investor confidence’ [Business Day 28 October 2013] 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 Dr Davies, however, it matters little that ‘the Investment Bill excludes recourse to international arbitration’ and instead gives jurisdiction over disputes to South Africa’s own courts. These courts ‘fare very well in terms of their capacity to enforce contracts’, he says. Moreover, South Africa is ‘a specialised commercial jurisdiction with efficient and well-capacitated legal professionals and an independent Judiciary’. [City Press 3 November 2013]

South African courts do generally function well in commercial matters and still have a significant degree of institutional independence. But the Bench has also been weakened by a number of poor appointments since 1994, which have already eroded business confidence in the capacity of the courts to decide complex commercial cases. 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 been criticised as executive-minded. These include its judgments on the certification of the 1996 Constitution, the validity of parliamentary ‘floor-crossing’ rules, the meaning of the equality clause in the Constitution, and the validity of regulations imposing price controls on medicines. Particularly relevant here too is its recent ruling (in the Agri-SA case outlined above) 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.

Dispute resolution
Under the Investment Bill, a foreign investor with a dispute over state action affecting his investment may request the DTI to refer the matter to mediation, under regulations to be drawn up by the minister. [Section 11(1), Investment Bill] There is, of course, no certainty as to what these regulations will provide, while the minister will not be obliged to refer them to Parliament for approval.

An investor may also refer such a dispute to domestic arbitration under the Arbitration Act of 1965. [Section 11(5), Investment Bill] However, the content of this latter statute is soon to change, for the minister of justice and constitutional development, Jeff Radebe, plans to put new legislation on arbitration before Parliament later this year. According to Mr Radebe, a key reason for new arbitration law is the importance of ‘synchronising’ this with the Investment Bill. [The New Age 29 November 2013]

The content of the new arbitration law has yet to be disclosed, but such legislation could, for example, allow the State increased control over the choice of arbitrators to preside over investment disputes. The mere possibility of such a change is also damaging to investor confidence.

Retroactive operation
According to the Investment Bill, its provisions will apply to investments ‘made before or after’ it is enacted into law and comes into operation. [Section 4(1), Investment Bill] This raises doubts as to whether foreign investors will in fact be able to rely on the ‘sunset’ clauses in the bilateral investment treaties now being terminated. Such clauses are supposed to retain existing protections for existing investments for specified periods (generally between ten and 20 years) after the termination of the relevant treaties. [Leon, ‘What we can learn’; Mail & Guardian 1 November 2013]

Mr Carim has said that investors covered by existing or already cancelled investment treaties will continue to have recourse to international arbitration during these ‘sunset’ periods. [Business Day 31 October 2013] But the wording of the Investment Bill casts doubt on this, while investors will in practice find it difficult to bring disputes before international arbitration if the Government insists that these matters are instead governed by the Investment Bill.

Repatriation of capital and income
As Mr Lang of Bowman Gilfillan notes, foreign investors also need the 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 in this regard is that ‘a foreign investor may, in respect of any investment, transfer funds, subject to taxation and other applicable legislation’. [Section 9, Investment Bill] This provision is too limited to give foreign investors the assurance they need.

Risks to local investors
Most of the media commentary on the Investment Bill has concentrated on the measure’s likely impact on foreign investors in South Africa. However, the impact of the Investment Bill on local investors is likely to be equally significant, especially as the Investment Bill provides a means of changing South Africa’s existing law on expropriation in a roundabout way.

Under the current Expropriation Act of 1975 (the Expropriation Act), the power to expropriate property is vested in the minister of public works and can be exercised solely ‘for public purposes’, rather than ‘in the public interest’. In addition, expropriated owners are entitled to full compensation, which must include not only on the market value of their property but also damages for consequential loss (including any loss of future income) and an additional small percentage as a solatium or solace. Moreover, the State must pay at least 80% of the compensation due at the time it takes possession of the property. It must also pay interest at commercial rates on the outstanding balance until such time as this has been fully paid. Though the current statute also allows the State to take ownership and possession of property by notice to the owner – via provisions now invalid for inconsistency with the Constitution – the rest of the Expropriation Act gives both local and foreign investors significant protection against any abuse by the State of its power to expropriate.

Since 2008 the Government has been seeking to enact a new expropriation bill that would:
• give the power to expropriate to all organs of state, from municipalities to national departments;
• allow expropriation both for public purposes and in the public interest;
• limit the compensation payable to market value, minus the four ‘discount’ factors listed in the Constitution (three of which are repeated in the Investment Bill);
• allow the State to delay the payment of compensation until after it has taken ownership and possession of the property, thereby putting great pressure on expropriated owners to accept whatever compensation it offers rather than remain without either the property or some portion of its value in money.

Both the Expropriation Bills of 2008 and 2013 were widely criticised, making it difficult for the Government to proceed with their adoption.  However, if the Investment Bill is enacted in its present form, the Government will no longer need to push an explicit expropriation measure through Parliament. This is because the Investment Bill will give it all the powers it wants – and in relation to domestic investors, as well as foreign ones.

That both domestic and foreign investors must be treated the same way is a key theme in the Investment Bill. According to its preamble, one of the key purposes is to create a ‘non-discriminatory’ environment for investments, [Preamble, Investment Bill] and ‘ensure the equal treatment [of] foreign investors and citizens of the Republic’. [Section 3, Investment Bill] In addition, the Investment Bill defines an investor as ‘any person who holds an investment in the Republic’, whether local or foreign. To reinforce this point, the Investment Bill further provides that an investor, ‘in the case of a natural person, means a person who holds an investment in the Republic, regardless of nationality’. [Section 3, Investment Bill] Under the Investment Bill, South African nationals will thus have no greater protection for their investments than foreigners will.

The Investment Bill also goes further in expanding the State’s power to expropriate than the proposed Expropriation Bills of 2008 and 2013 have done. First, the Investment Bill affirms the Government’s ‘sovereign right’ to take such measures as it sees fit to fulfil a number of ‘transformation’ goals, including those ostensibly aimed at redressing ‘historical, social, and economic inequalities’. [Section 10, Investment Bill] Second, the Investment Bill expressly states that a number of possible actions by the Government ‘do not amount to acts of expropriation’ at all. [Section 8(2), Investment Bill]

The significance of this last clause merits further examination. Its first, and most obvious consequence, is to ensure that the termination of old-order mining rights can no longer be considered an act of expropriation. However, most of these rights have already been converted into new-order mining licences or have ceased to exist. More pertinent, thus, is the fact that, under this clause, no other deprivation of property will amount to expropriation if ‘the State does not acquire ownership’ and ‘there is no permanent destruction of the economic value of the investment’. [Section 8(2), Investment Bill]

Say, then, that the Government were to pass legislation (loosely modelled on the MPRDA) providing that all agricultural land vests in the State as custodian of the nation’s land resources, and allowing black South Africans to apply to the relevant department for the right to use portions of such land for specified periods. In these circumstances, the State would not take ownership of the property and there would be ‘no permanent destruction of the economic value’ of the land. This means there would be no ‘act of expropriation’ under the Investment Bill – and no possibility of obtaining compensation.

In addition, the enactment of the Investment Bill could give the Government supposedly good reason to repeal the current Expropriation Act, which would then give domestic investors greater protection than foreign ones. The Government could use this point to argue that the differential is contrary to the terms of the Investment Bill and inconsistent with the guarantee of equality before the law in the 1996 Constitution.

If the Expropriation Act were to be repealed, the Government would have no need to enact a new expropriation bill, with all the criticisms this would be likely to unleash. Instead, all South Africans would find their rights on expropriation were already governed by the Investment Bill. This would leave them with far less effective remedies than they now enjoy against the taking of their property by the State.

The State might argue that it has no intention of using the Investment Bill as a precursor to repealing the Expropriation Act and thereby stripping away the protections against expropriation that local investors currently enjoy. However, the wording of the Investment Bill would also lend itself to such an outcome, while there is little in the Investment Bill to prevent it.

Damage to the economy
The Investment Bill has major ramifications for both foreign and local investors, for it significantly broadens the scope for expropriation while diminishing the rights to compensation which both categories of investors currently enjoy.

As regards foreign investors, the termination of current bilateral investment treaties with European states and the adoption of the Investment Bill will reduce the protection afforded them, as Dr Davies has acknowledged. Yet, according to a Goldman Sachs report published late last year, South Africa needs R77bn ($7.5bn) 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]

Dr Davies says that the termination of South Africa’s bilateral investment treaties with European states 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 Dr Davies’ last assertion 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, their confidence in South Africa as an investment destination is likely to be further damaged by the Government’s about-face on its investment treaties and its evident willingness to renege on commitments earlier made.

Moreover, soon after Government gave notice of its intention to terminate the country’s investment treaties with Germany and Switzerland, South Africa’s credit risk jumped to a two-month high. As The Star’s Business Report recorded in an article early in November 2013: ‘The cost of insuring the nation’s debt against default for five years has climbed 22 basis points this month to 208 basis points, the highest level since September 11 and the biggest increase among 12 major-currency markets.’ [Business Report 8 November 2013] This too highlights the extent to which the country’s investment climate is perceived to be deteriorating.

More seriously still, the European countries with which South Africa’s investment treaties are being terminated are collectively South Africa’s biggest trading partners. They are also the source of 88% of its FDI, making them by far the biggest outside investors in South Africa. [Business Day 18 November 2013]

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]

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 balance of payments current account deficit – we need foreigners to continue to finance our habit…. But South Africa has not been particularly good at attracting FDI,…Goldman Sachs calculating that, on a net basis, South Africa has received annual average FDI of only $1.9bn over the past two decades…  [Yet] 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. And in the present environment, this is not a message that South Africa can afford to send.’ [Business Day 12 November 2013]

In addition, all these comments focus on the negative ramifications of the Investment Bill for foreign investors. Even more important, however, is the damage the measure is likely to do to local investors and their confidence in the country. If the Government indeed uses it as a justification to repeal the current Expropriation Act, then the Investment Bill will set the limits for the protection against expropriation that all local investors will enjoy. This will repel, rather than promote, the domestic direct investment the country also badly needs to raise the growth rate and overcome its unemployment crisis.

The Government once again seems careless of the damage to the economy its interventions are likely to bring about. Having already introduced a host of dirigiste amendments to mining law, labour law, employment equity legislation, the BEE framework statute, the detailed BEE generic codes, and the land reform process, it is now also putting direct investment from foreign and local investors at yet further risk via the cancellation of investment treaties and the introduction of the Investment Bill.

The way forward
There are already so many major obstacles to direct investment in South Africa – ranging from the dirigiste amendments 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 should scrap the Investment Bill, withdraw the five notices of termination it has already issued, and give all European states the assurance that the country’s existing bilateral investment treaties will remain in force. In addition, the current Expropriation Act of 1975 should be retained, so as to boost investor confidence and encourage the direct investment the country so urgently requires.

The Government might argue that the Expropriation Act cannot be kept in place because it is inconsistent with the Constitution. However, this is a red herring, for the current Act can easily be brought into line with the Constitution through a few simple amendments.

The first amendment would give the minister of public works the power to expropriate ‘in the public interest’ as well as ‘for public purposes’. In this way, this constitutional criterion would be incorporated into the current Act.

The second amendment would add, to the factors relevant to compensation under the current Act, the four ‘missing’ factors listed in section 25(3) of the Constitution. On this basis, the compensation payable on expropriation would be determined on the basis of:
$ market value;
$ the four other listed factors, ie:
the current use of the property
the history of its acquisition and use
  the extent of direct state subsidy in its acquisition and beneficial capital improvement, and
the purpose of the expropriation;
$ damages for consequential loss resulting from expropriation; and
$ an appropriate additional percentage as a solatium or solace.

This small change to the current Act would bring its provisions on compensation fully into line with section 25 of the Constitution, which says that compensation must be determined in the light of all the relevant circumstances. This means there is no reason to exclude the last two factors, which already form part of the current Act and should simply be retained. 

The third amendment would acknowledge all the Constitution’s requirements for valid expropriation. It would thus prevent the State from giving notice of expropriation until it has obtained a court order confirming:
• that the proposed expropriation is authorised by a law of general application and is not arbitrary;
• that it is in the public interest (as defined in the Constitution) or for public purposes; 
• that the compensation proposed is indeed just and equitable, reflecting a proper interpretation and application by the State of all the factors identified above; and
• that no person will be evicted from his home as a result of an expropriation without a court order expressly allowing the eviction in all the relevant circumstances. 

This change would bring the current Expropriation Act fully into line with the Constitution by giving appropriate recognition to Section 25 (the property clause), Section 34 (the right of access to court), and Section 26 (the housing clause with its guarantee against eviction).

Taking these steps would give the country a far more realistic prospect of fulfilling 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 DTI continues on its present path. At the very least, the proposals outlined here need swiftly to be implemented, so as to reassure both local and foreign investors and improve South Africa’s investment climate.


South African Institute of Race Relations NPC    31st January 2014

IRR TV

South African Institute of Race Relations NPC
Submission to the Department of Trade and Industry
regarding the
Promotion and Protection of Investment Bill of 2013
Johannesburg, 31st January 2014


Introduction
The Department of Trade and Industry (DTI) has invited comment on the Promotion and Protection of Investment Bill of 2013 (the Investment Bill). According to the Preamble, the Investment Bill ‘recognises the importance [of] investment…in job creation, economic growth, development, and the well-being of the people of South Africa’. It thus seeks to ‘promote investment’ and ‘provide a sound legislative framework for the…protection of all investments, including foreign ones’. [Preamble, Investment Bill]

However, the Investment Bill is unlikely to attain any of these objectives. In combination with the Government’s intention to terminate a number of bilateral investment treaties with European states, the Investment Bill is likely to repel, rather than promote, foreign direct investment. It will also erode the property rights of all local investors, making it harder still for the country to raise its annual rate of economic growth or generate the new jobs needed by 8 million unemployed South Africans.

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 investors ‘prompt, adequate and effective compensation’, thus entitling them to the full market value of their property. In addition, these treaties give the task of deciding the amount of compensation payable to international arbitrators, rather than domestic courts. This provides investors with an important guarantee of independence in the adjudication of their claims. [City Press 3, Business Day 8 November 2013]

The treaties also commonly guarantee foreign investors ‘fair and equitable’ treatment, thus requiring the State to act transparently, reasonably, and without ambiguity. However, the South African Government has failed to uphold this obligation. Instead, it has adopted various statutes – including the Mineral and Petroleum Resources Development Act (MPRDA) of 2002 – which contain a number of ambiguous provisions and give officials a largely unfettered discretion as to how these are to be interpreted and applied. [Peter Leon, ‘What we can learn from the rest of Africa’, politicsweb.co.za, 30 October 2013]

In requiring a predictable regulatory framework, the treaties also constrain the imposition of new state controls over investments previously made. This means, for example, that recent proposed amendments to the MPRDA, which would allow the introduction of price and export controls on ‘designated’ and ‘strategic’ minerals, could conflict with the protections given to foreign mining companies under these agreements. Says Peter Leon, an expert on mining law: ‘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]

Moreover, while domestic legislation can be amended by Parliament at any time, the terms of bilateral investment treaties cannot be changed unilaterally, but only by agreement between the signatory states. This consolidates investor protection – and 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’]

However, bilateral investment treaties generally remain in force for specified periods, and often include clauses providing for their automatic renewal or for their termination in accordance with relevant notice provisions. The Government is currently taking advantage of such provisions to bring an end to some 13 bilateral investment treaties it earlier concluded with European countries.

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. According to Xavier Carim, deputy director for international trade and economic development within the DTI, these treaties were ‘very poorly drafted and left wide scope for interpretation’. Hence, the ‘reasonable option’ was to terminate these agreements. [Business Day 8 November 2013]

Reporting on its review in 2009, the DTI described these treaties as ‘unequal and exploitative agreements, which prohibited the very policies…needed to fight poverty’. These agreements also allowed the private sector to challenge regulatory changes which the Government saw as being in the public interest. [Leon, ‘What we can learn’]

The DTI thus recommended that existing bilateral investment treaties be restructured. It also suggested that domestic legislation might replace these agreements, as this would allow protection for investors to be balanced against the country’s developmental and transformation needs. [Leon, ‘What we can learn’; Business Report 18 November 2013]

Much of the impetus for this critical review – along with the conclusions reached by the DTI – came from the Graniti case, in which several Italians and a Luxembourg-based company, which together controlled much of South Africa’s granite industry, filed a claim for $266m in compensation for the expropriation of their old-order mining rights under the MPRDA. The case was brought under South Africa’s bilateral investment treaties with Italy and the Belgo-Luxembourg Economic Union, both of which provide for disputes to be settled via international arbitration before the International Centre for Settlement of Investment Disputes, an arm of the World Bank. [Business Day 28 July 2009, Business Report 5 November 2013; Piero Foresti, Laura de Carli and others v The Republic of South Africa, ICSID Case no ARB(AF)/07/01]

The Graniti claim (except for the question of costs) was settled in 2010 before it came to arbitration. Under this settlement, as Mr Leon notes, the Government agreed that the claimants need not meet the usual 26% black economic empowerment (BEE) ownership requirement, as set out in the MPRDA and its accompanying mining charter. Instead, they could limit black ownership to 5%. Moreover, instead of having to transfer 5% of equity or assets to black investors, the Government further agreed that they could set off the value of their local beneficiation activities against their obligation to increase black ownership to 5%. This marked a significant victory for the claimants, as no other mining company (in Mr Leon’s words) was ‘treated so generously or…allowed to offset its beneficiation activities against the charter’s ownership requirements’. [Business Day 28 July 2009, 8 November 2013]

Against this background, the director general of trade and industry, Lionel October, concluded that the key problem with ‘the badly drafted treaties’ was that they allowed ‘the legal and business community to challenge regulatory changes the Government considerd to be in the public interest’. This meant that the treaties were ‘open to abuse by parties opposed to government policies such as the MPRDA’. [Business Day 31 October 2013]

This problem has also been highlighted by Joseph Stiglitz, a professor of economics at Columbia University (and also a former senior vice president and chief economist at the World Bank), who criticises investment treaties. Such agreements, he says, have been used to ‘challenge government actions, from debt restructuring to affirmative action’. Worse still, ‘investment agreements enable companies to sue governments over perfectly sensible and just regulatory changes’, such as anti-smoking laws. Moreover, ‘in South Africa, a company could sue if it believes its bottom line might be harmed by programmes designed to address the legacy of official racism’. [Business Day 7 November 2013]

In 2010 the Cabinet thus accepted the DTI’s recommendations. It decided on a new policy framework that would include the drafting and adoption of a suitable investment statute, along with the termination of existing ‘old-generation’ bilateral investment treaties and the development of a ‘new model’ to govern such agreements. The task of terminating old-generation treaties was given to the Department of International Relations. [Engineering News 21 October 2013] 

The termination process
In 2012 the Government gave notice of its intention to terminate one of the investment treaties (that with the Belgo-Luxembourg Economic Union), under which the Graniti case had been lodged. Thereafter, termination notices were served on Spain and the Netherlands. According to Mustaqeem de Gama, director of international trade and investment in the DTI, these treaties were dealt with first because they contained ‘automatic renewal clauses and therefore would have been extended had they not been terminated in time’. [Engineering News 21 October 2013]

In October 2013, South Africa also served a termination notice on Germany, a country which has long been one of its largest foreign investors. Moreover, as Business Day reported, German companies employ more than 90 000 people in South Africa and have cumulatively invested more than R80bn here.  The South African-German Chamber of Commerce and Industry warned that the termination of the treaty was likely to ‘have a negative impact on general investor confidence’ in South Africa. [Business Day 28, 29 October 2013]

In the same month, the Government also gave notice of its intention to terminate its bilateral investment treaty with Switzerland, another major investor in South Africa with R27.4bn of direct investment in this country in 2011 alone. Responded Henrich Maurer, deputy head of the Swiss mission in South Africa: ‘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]

The Government now plans to terminate its bilateral investment treaties with other European states, and to replace the extensive guarantees provided for investors under these agreements with the far more limited protections set out in the Investment Bill.

Reasons for the Investment Bill
The Investment Bill is a vital part of the new regulatory framework endorsed by the Cabinet in 2010. According to the minister of trade and industry, Rob Davies, the Investment Bill will ‘create a comprehensive and uniform legal framework’ for both foreign and local investors. It will thus also address the concerns of domestic investors who (in the words of Dr de Gama) ‘believe that foreign investors have been given unfair advantages in the past’. [Engineering News 21 October 2013]

As Dr de Gama implicitly acknowledges, the Investment Bill reduces the protections that foreign investors now enjoy. According to Jonathan Lang of Bowman Gilfillan, a law firm, the real reason for its introduction is that the Government is trying to ‘protect itself against claims by foreign investors that BEE legislation and the MPRDA, for example, may amount to indirect expropriation of property’. [Bowman Gilfillan, ‘DTI changes tack on bilateral investment treaties’, 14 November 2013, p2]

Mr Leon echoes this view, saying that proposed amendments to the MPRDA (as outlined above) might violate the country’s bilateral investment treaties, along with the protection against arbitrary deprivation of property under Section 25 (the property clause) of the Constitution. Hence, the termination of the treaties and introduction of the Investment Bill have less to do with ‘modernising and updating our investment protection regime’, as Dr Davies states, [Mail & Guardian 27 September 2013] than with avoiding liability under the agreements the country earlier signed.

Content of the Investment Bill
A broad definition of ‘investments’
The Investment Bill defines ‘investments’ as including companies, shares, land, and movable property, along with patents and other intellectual property rights. Also included are mining rights and other ‘licences, authorisations, or permits…to carry out economic and commercial activities’. However, to qualify for protection, an investment must be used for commercial purposes. It must also be ‘a material economic’ one, or have a ‘significant underlying physical presence in the Republic’ in the form of ‘operational facilities’, for instance. [Sections 4, 1, Investment Bill]

‘Principles regarding expropriation’
The Investment Bill provides some protection against expropriation by stating that ‘an investment cannot be expropriated except in accordance with the Constitution and in terms of a law of general application for public purposes or in the public interest, under due process of law’. [Section 8(1), Investment Bill]

The Investment Bill thus echoes the Constitution in allowing expropriation not only ‘for public purposes’ but also ‘in the public interest’. However, 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] The Investment Bill, by contrast, suggests that expropriation may be used in more wide-ranging circumstances.

By contrast, the relevant investment treaties allow expropriation solely ‘for public purposes’, such as the building of a new dam or road. The Investment Bill not only disregards this constraint, but also seeks to narrow the meaning of expropriation by baldly asserting that a number of state actions ‘do not amount to acts of expropriation’ at all.

Narrowing the meaning of expropriation
Section 8 of the Investment Bill attempts to narrow the meaning of expropriation by stating that ‘the following acts, which are not limited [to the list provided], do not amount to acts of expropriation’. Among the actions listed are: [Section 8(2), Investment Bill]
• ‘measures aimed at protecting or enhancing legitimate public welfare objectives, such as public health…or state security’;
• the ‘revocation or limitation…of intellectual property rights’ to the extent that this is ‘consistent with applicable international agreements’; and
• ‘measures which result in the deprivation of property but where the State does not acquire ownership of such property’, provided that ‘there is no permanent destruction of the economic value of the investment’ or ‘the investor’s ability to…use or control his investment is not unduly impeded’.

This last provision seems to be intended to cover the loss of ‘old-order’ mining rights under the MPRDA. If such rights are not converted into ‘new-order’ mining licences within the time periods laid down in the MPRDA, they ‘cease to exist’ under the provisions of that statute. According to the Constitutional Court in a recent case brought by Agri-SA, the principal voice of organised agriculture, the holder of an old-order right which ends in this way is thereby deprived of his earlier right. However, he does not suffer an expropriation because the State does not acquire ownership of the right he has lost, but rather takes his right as custodian for others. In addition, the former owner is able to apply for a new-order mining licence which, if granted, will allow him to continue exploiting (or, in the words of the Investment Bill, ‘using and controlling’) the minerals in question. [Agri South Africa v Minister for Minerals and Energy, Case CCT51/12, judgment of the Constitutional Court of South Africa, 18 April 2013]

Overall, this provision in the Investment Bill is so wide-ranging that its full ambit is difficult to foresee. At minimum, it seems to be intended to prevent any repetition of the Graniti litigation, while giving the State the power to curtail the intellectual property rights of pharmaceutical companies, or justify new legislation requiring 51% local ownership for foreign security companies operating within the country. However, the provision also has further important ramifications, as described in Risks to local investors, below.

The Government’s ‘sovereign rights’
As earlier noted, the bilateral investment treaties now being cancelled include guarantees of ‘fair and equitable’ treatment for foreign investors, thus empowering them to seek compensation for regulatory changes – such as those in the MPRDA and the proposed amendments to it – that reduce the value of their investments.

To counter any such constraint on regulatory change, the Investment Bill asserts the Government’s ‘sovereign right’ to pursue various policy objectives, and indicates that this right cannot be impeded by protections for investors. The Investment Bill thus states that both the Government and ‘any organ of State’ may ‘take measures, in accordance with the Constitution’ to:

• ‘redress historical, social and economic inequalities’;
• foster economic development, industrialisation, and beneficiation’;
• ‘achieve the progressive realisation of socio-economic rights’; and
• ‘protect the essential security interests, including…[the] financial stability’, of the country.

Again, these provisions are so wide-ranging and open-ended that their ramifications are hard to assess. However, they clearly seem intended to provide a legal justification, among other things, for other proposed amendments to the MPRDA which will give the mining minister the power to stipulate what percentages of minerals must be set aside for local beneficiation, and what prices may be charged for these percentages. The introduction of such additional state controls is inconsistent with the investment treaties South Africa has signed, but the Investment Bill seeks simply to brush this obstacle aside. [Leon, ‘What we can learn’; Mineral and Petroleum Resources Development Amendment Bill of 2013]

Compensation on expropriation
Under the bilateral investment treaties South Africa is in the process of terminating, compensation for expropriation must be ‘prompt, adequate, and effective’. Under the Investment Bill, by contrast, compensation is likely to be less than full market value.

According to the Investment Bill, the compensation payable on expropriation must ‘reflect an equitable balance between the public interest and the interests of those affected, having regard to all relevant circumstances’. The relevant factors it lists include not only ‘the market value of the investment’ but also its ‘current use’, the ‘history of its acquisition and use’, and ‘the purpose of the expropriation’. [Section 8(3), Investment Bill]

Though this provision echoes the property clause in the Constitution, it also means that investors are likely to receive significantly less than the market value of their investments (and perhaps only 60% of that value, as some commentators surmise). This is a major change from the comprehensive compensation currently available to investors under both the bilateral investment treaties and the country’s Expropriation Act of 1975 (see Risks to local investors, below).  Adds 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]

Limits on protection for foreign investors
Other provisions of the Investment Bill limit the protection available to foreign investors in three ways:

Compliance with domestic legislation
According to the Investment Bill, ‘the protection of foreign investment is subject to compliance with applicable domestic legislation’. [Section 5(2), Investment Bill] If such a clause had been in force at the time of the Graniti case, it would have been difficult for the claimants to obtain any redress without first demonstrating their compliance with the MPRDA and its accompanying Mining Charter. Moreover, now that the largely aspirational targets in the initial mining charter have been turned into hard numerical quotas under the revised Mining Charter of 2010, this clause could be particularly effective in inhibiting access to redress.

Moreover, beyond the mining sector, the same considerations will apply to other foreign investors subject to the unrealistic BEE targets contained either in the generic codes of good practice or the various sector codes gazetted by the DTI.

‘Security of investment’
According to the Investment Bill, ‘the Republic must accord foreign investors…[an] equal level of security as may be generally provided to other investors and subject to available resources and capacity’. [Section 7(1), Investment Bill]

This clause, though poorly drafted, suggests that the amount of compensation payable will depend not only on market value and the three ‘discount’ factors set out above, but also on the ‘resources’ available to the Government. This could allow South Africa – which already has large budget and current account deficits – to argue that its resources are too limited for it to pay even 60% of market value to foreign investors whose property has been expropriated in the public interest.

‘Like circumstances’
The Investment Bill further provides that the Government must treat foreign investors ‘not less favourably than it treats South African investors in their business operations that are in like circumstances’. [Section 6(1), Investment Bill]

This clause is again vaguely worded, while the Investment Bill’s further explanation of ‘like circumstances’ is also difficult to understand. All that this provision makes clear is that ‘an overall examination on a case-by-case basis of all the terms of a foreign investment’ will be required. [Section 6(4), Investment Bill] However, some commentators are concerned that these provisions could bar foreign investors from protection if such investors have not performed comparatively with domestic investors on issues such as job creation, local procurement, BEE ownership transactions, and the like. 

Timing of compensation
Under South Africa’s bilateral investment treaties, payment must be ‘prompt’ as well as ‘adequate’ and ‘effective’. This formulation has a well-established meaning, requiring that payment be immediate rather than delayed. The Investment Bill, by contrast, merely states that ‘just and equitable compensation must be effected in a timely manner’. [Section 8(1), Investment Bill]

Adjudication of disputes
South Africa’s bilateral investment treaties give the power to adjudicate disputes to international arbitrators unlikely to be swayed by domestic political considerations. By contrast, the Investment Bill requires an aggrieved foreign investor to seek ‘a review by a competent [South African] court’ (or refer the matter to the domestic dispute resolution procedures outlined below). [Business Day 31 October 2013; Sections 8(5), Investment Bill]

According to Professor Stiglitz, the international arbitration for which investment treaties provide has proved to be ‘arbitrary and capricious, with no systemic way to reconcile incompatible rulings issued by different panels’. This has not only increased uncertainty, but also subjected many governments to ‘enormous payouts’ and exorbitant legal costs. [Business Day 7 November 2013] The implication is that domestic courts would generally do better in adjudicating disputes, but many countries do not have local courts that are sufficiently independent, efficient, or reliable. [Business Day 31 October 2013]

The removal of international arbitration under the Investment Bill, writes Mr Leon, is a ‘retrogressive step’. It is also out of line with international best practice, as international arbitration ‘provides investors with increased certainty and contributes to investor confidence’ [Business Day 28 October 2013] 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 Dr Davies, however, it matters little that ‘the Investment Bill excludes recourse to international arbitration’ and instead gives jurisdiction over disputes to South Africa’s own courts. These courts ‘fare very well in terms of their capacity to enforce contracts’, he says. Moreover, South Africa is ‘a specialised commercial jurisdiction with efficient and well-capacitated legal professionals and an independent Judiciary’. [City Press 3 November 2013]

South African courts do generally function well in commercial matters and still have a significant degree of institutional independence. But the Bench has also been weakened by a number of poor appointments since 1994, which have already eroded business confidence in the capacity of the courts to decide complex commercial cases. 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 been criticised as executive-minded. These include its judgments on the certification of the 1996 Constitution, the validity of parliamentary ‘floor-crossing’ rules, the meaning of the equality clause in the Constitution, and the validity of regulations imposing price controls on medicines. Particularly relevant here too is its recent ruling (in the Agri-SA case outlined above) 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.

Dispute resolution
Under the Investment Bill, a foreign investor with a dispute over state action affecting his investment may request the DTI to refer the matter to mediation, under regulations to be drawn up by the minister. [Section 11(1), Investment Bill] There is, of course, no certainty as to what these regulations will provide, while the minister will not be obliged to refer them to Parliament for approval.

An investor may also refer such a dispute to domestic arbitration under the Arbitration Act of 1965. [Section 11(5), Investment Bill] However, the content of this latter statute is soon to change, for the minister of justice and constitutional development, Jeff Radebe, plans to put new legislation on arbitration before Parliament later this year. According to Mr Radebe, a key reason for new arbitration law is the importance of ‘synchronising’ this with the Investment Bill. [The New Age 29 November 2013]

The content of the new arbitration law has yet to be disclosed, but such legislation could, for example, allow the State increased control over the choice of arbitrators to preside over investment disputes. The mere possibility of such a change is also damaging to investor confidence.

Retroactive operation
According to the Investment Bill, its provisions will apply to investments ‘made before or after’ it is enacted into law and comes into operation. [Section 4(1), Investment Bill] This raises doubts as to whether foreign investors will in fact be able to rely on the ‘sunset’ clauses in the bilateral investment treaties now being terminated. Such clauses are supposed to retain existing protections for existing investments for specified periods (generally between ten and 20 years) after the termination of the relevant treaties. [Leon, ‘What we can learn’; Mail & Guardian 1 November 2013]

Mr Carim has said that investors covered by existing or already cancelled investment treaties will continue to have recourse to international arbitration during these ‘sunset’ periods. [Business Day 31 October 2013] But the wording of the Investment Bill casts doubt on this, while investors will in practice find it difficult to bring disputes before international arbitration if the Government insists that these matters are instead governed by the Investment Bill.

Repatriation of capital and income
As Mr Lang of Bowman Gilfillan notes, foreign investors also need the 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 in this regard is that ‘a foreign investor may, in respect of any investment, transfer funds, subject to taxation and other applicable legislation’. [Section 9, Investment Bill] This provision is too limited to give foreign investors the assurance they need.

Risks to local investors
Most of the media commentary on the Investment Bill has concentrated on the measure’s likely impact on foreign investors in South Africa. However, the impact of the Investment Bill on local investors is likely to be equally significant, especially as the Investment Bill provides a means of changing South Africa’s existing law on expropriation in a roundabout way.

Under the current Expropriation Act of 1975 (the Expropriation Act), the power to expropriate property is vested in the minister of public works and can be exercised solely ‘for public purposes’, rather than ‘in the public interest’. In addition, expropriated owners are entitled to full compensation, which must include not only on the market value of their property but also damages for consequential loss (including any loss of future income) and an additional small percentage as a solatium or solace. Moreover, the State must pay at least 80% of the compensation due at the time it takes possession of the property. It must also pay interest at commercial rates on the outstanding balance until such time as this has been fully paid. Though the current statute also allows the State to take ownership and possession of property by notice to the owner – via provisions now invalid for inconsistency with the Constitution – the rest of the Expropriation Act gives both local and foreign investors significant protection against any abuse by the State of its power to expropriate.

Since 2008 the Government has been seeking to enact a new expropriation bill that would:
• give the power to expropriate to all organs of state, from municipalities to national departments;
• allow expropriation both for public purposes and in the public interest;
• limit the compensation payable to market value, minus the four ‘discount’ factors listed in the Constitution (three of which are repeated in the Investment Bill);
• allow the State to delay the payment of compensation until after it has taken ownership and possession of the property, thereby putting great pressure on expropriated owners to accept whatever compensation it offers rather than remain without either the property or some portion of its value in money.

Both the Expropriation Bills of 2008 and 2013 were widely criticised, making it difficult for the Government to proceed with their adoption.  However, if the Investment Bill is enacted in its present form, the Government will no longer need to push an explicit expropriation measure through Parliament. This is because the Investment Bill will give it all the powers it wants – and in relation to domestic investors, as well as foreign ones.

That both domestic and foreign investors must be treated the same way is a key theme in the Investment Bill. According to its preamble, one of the key purposes is to create a ‘non-discriminatory’ environment for investments, [Preamble, Investment Bill] and ‘ensure the equal treatment [of] foreign investors and citizens of the Republic’. [Section 3, Investment Bill] In addition, the Investment Bill defines an investor as ‘any person who holds an investment in the Republic’, whether local or foreign. To reinforce this point, the Investment Bill further provides that an investor, ‘in the case of a natural person, means a person who holds an investment in the Republic, regardless of nationality’. [Section 3, Investment Bill] Under the Investment Bill, South African nationals will thus have no greater protection for their investments than foreigners will.

The Investment Bill also goes further in expanding the State’s power to expropriate than the proposed Expropriation Bills of 2008 and 2013 have done. First, the Investment Bill affirms the Government’s ‘sovereign right’ to take such measures as it sees fit to fulfil a number of ‘transformation’ goals, including those ostensibly aimed at redressing ‘historical, social, and economic inequalities’. [Section 10, Investment Bill] Second, the Investment Bill expressly states that a number of possible actions by the Government ‘do not amount to acts of expropriation’ at all. [Section 8(2), Investment Bill]

The significance of this last clause merits further examination. Its first, and most obvious consequence, is to ensure that the termination of old-order mining rights can no longer be considered an act of expropriation. However, most of these rights have already been converted into new-order mining licences or have ceased to exist. More pertinent, thus, is the fact that, under this clause, no other deprivation of property will amount to expropriation if ‘the State does not acquire ownership’ and ‘there is no permanent destruction of the economic value of the investment’. [Section 8(2), Investment Bill]

Say, then, that the Government were to pass legislation (loosely modelled on the MPRDA) providing that all agricultural land vests in the State as custodian of the nation’s land resources, and allowing black South Africans to apply to the relevant department for the right to use portions of such land for specified periods. In these circumstances, the State would not take ownership of the property and there would be ‘no permanent destruction of the economic value’ of the land. This means there would be no ‘act of expropriation’ under the Investment Bill – and no possibility of obtaining compensation.

In addition, the enactment of the Investment Bill could give the Government supposedly good reason to repeal the current Expropriation Act, which would then give domestic investors greater protection than foreign ones. The Government could use this point to argue that the differential is contrary to the terms of the Investment Bill and inconsistent with the guarantee of equality before the law in the 1996 Constitution.

If the Expropriation Act were to be repealed, the Government would have no need to enact a new expropriation bill, with all the criticisms this would be likely to unleash. Instead, all South Africans would find their rights on expropriation were already governed by the Investment Bill. This would leave them with far less effective remedies than they now enjoy against the taking of their property by the State.

The State might argue that it has no intention of using the Investment Bill as a precursor to repealing the Expropriation Act and thereby stripping away the protections against expropriation that local investors currently enjoy. However, the wording of the Investment Bill would also lend itself to such an outcome, while there is little in the Investment Bill to prevent it.

Damage to the economy
The Investment Bill has major ramifications for both foreign and local investors, for it significantly broadens the scope for expropriation while diminishing the rights to compensation which both categories of investors currently enjoy.

As regards foreign investors, the termination of current bilateral investment treaties with European states and the adoption of the Investment Bill will reduce the protection afforded them, as Dr Davies has acknowledged. Yet, according to a Goldman Sachs report published late last year, South Africa needs R77bn ($7.5bn) 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]

Dr Davies says that the termination of South Africa’s bilateral investment treaties with European states 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 Dr Davies’ last assertion 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, their confidence in South Africa as an investment destination is likely to be further damaged by the Government’s about-face on its investment treaties and its evident willingness to renege on commitments earlier made.

Moreover, soon after Government gave notice of its intention to terminate the country’s investment treaties with Germany and Switzerland, South Africa’s credit risk jumped to a two-month high. As The Star’s Business Report recorded in an article early in November 2013: ‘The cost of insuring the nation’s debt against default for five years has climbed 22 basis points this month to 208 basis points, the highest level since September 11 and the biggest increase among 12 major-currency markets.’ [Business Report 8 November 2013] This too highlights the extent to which the country’s investment climate is perceived to be deteriorating.

More seriously still, the European countries with which South Africa’s investment treaties are being terminated are collectively South Africa’s biggest trading partners. They are also the source of 88% of its FDI, making them by far the biggest outside investors in South Africa. [Business Day 18 November 2013]

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]

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 balance of payments current account deficit – we need foreigners to continue to finance our habit…. But South Africa has not been particularly good at attracting FDI,…Goldman Sachs calculating that, on a net basis, South Africa has received annual average FDI of only $1.9bn over the past two decades…  [Yet] 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. And in the present environment, this is not a message that South Africa can afford to send.’ [Business Day 12 November 2013]

In addition, all these comments focus on the negative ramifications of the Investment Bill for foreign investors. Even more important, however, is the damage the measure is likely to do to local investors and their confidence in the country. If the Government indeed uses it as a justification to repeal the current Expropriation Act, then the Investment Bill will set the limits for the protection against expropriation that all local investors will enjoy. This will repel, rather than promote, the domestic direct investment the country also badly needs to raise the growth rate and overcome its unemployment crisis.

The Government once again seems careless of the damage to the economy its interventions are likely to bring about. Having already introduced a host of dirigiste amendments to mining law, labour law, employment equity legislation, the BEE framework statute, the detailed BEE generic codes, and the land reform process, it is now also putting direct investment from foreign and local investors at yet further risk via the cancellation of investment treaties and the introduction of the Investment Bill.

The way forward
There are already so many major obstacles to direct investment in South Africa – ranging from the dirigiste amendments 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 should scrap the Investment Bill, withdraw the five notices of termination it has already issued, and give all European states the assurance that the country’s existing bilateral investment treaties will remain in force. In addition, the current Expropriation Act of 1975 should be retained, so as to boost investor confidence and encourage the direct investment the country so urgently requires.

The Government might argue that the Expropriation Act cannot be kept in place because it is inconsistent with the Constitution. However, this is a red herring, for the current Act can easily be brought into line with the Constitution through a few simple amendments.

The first amendment would give the minister of public works the power to expropriate ‘in the public interest’ as well as ‘for public purposes’. In this way, this constitutional criterion would be incorporated into the current Act.

The second amendment would add, to the factors relevant to compensation under the current Act, the four ‘missing’ factors listed in section 25(3) of the Constitution. On this basis, the compensation payable on expropriation would be determined on the basis of:
$ market value;
$ the four other listed factors, ie:
the current use of the property
the history of its acquisition and use
  the extent of direct state subsidy in its acquisition and beneficial capital improvement, and
the purpose of the expropriation;
$ damages for consequential loss resulting from expropriation; and
$ an appropriate additional percentage as a solatium or solace.

This small change to the current Act would bring its provisions on compensation fully into line with section 25 of the Constitution, which says that compensation must be determined in the light of all the relevant circumstances. This means there is no reason to exclude the last two factors, which already form part of the current Act and should simply be retained. 

The third amendment would acknowledge all the Constitution’s requirements for valid expropriation. It would thus prevent the State from giving notice of expropriation until it has obtained a court order confirming:
• that the proposed expropriation is authorised by a law of general application and is not arbitrary;
• that it is in the public interest (as defined in the Constitution) or for public purposes; 
• that the compensation proposed is indeed just and equitable, reflecting a proper interpretation and application by the State of all the factors identified above; and
• that no person will be evicted from his home as a result of an expropriation without a court order expressly allowing the eviction in all the relevant circumstances. 

This change would bring the current Expropriation Act fully into line with the Constitution by giving appropriate recognition to Section 25 (the property clause), Section 34 (the right of access to court), and Section 26 (the housing clause with its guarantee against eviction).

Taking these steps would give the country a far more realistic prospect of fulfilling 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 DTI continues on its present path. At the very least, the proposals outlined here need swiftly to be implemented, so as to reassure both local and foreign investors and improve South Africa’s investment climate.


South African Institute of Race Relations NPC    31st January 2014

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