South African Institute of Race Relations NPC
Submission to the Portfolio Committee on Trade and Industry
regarding the
Promotion and Protection of Investment Bill of 2015 [B18-2015]
Johannesburg, 25th August 2015
SYNOPSIS
Introduction
The Portfolio Committee on Trade and Industry (the committee) has invited comment on the Promotion and Protection of Investment Bill of 2015 (the Investment Bill). This submission is made by the South African Institute of Race Relations NPC (IRR), a non-profit organisation formed in 1929 to oppose racial discrimination and promote racial goodwill. Its present objects are to promote democracy, human rights, development, and reconciliation between the peoples of South Africa.
The current Investment Bill is better than its 2013 predecessor in that it omits provisions that sought to empower the State to take property without paying any compensation for it at all. However, the revised Investment Bill is still damaging in many ways and needs to be withdrawn, rather than adopted.
According to its Preamble, the Investment Bill “recognises the importance that investment plays in job creation, economic growth, sustainable development, and the well-being of the people of South Africa”. It thus seeks to “promote investment” by creating a facilitating environment and “providing a sound legislative framework for the…protection of all investments, including foreign investments”. [Preamble, Investment Bill]
However, the Investment Bill is unlikely to attain these objectives. In combination with a host of other laws undermining property rights, the Investment Bill is likely to repel, rather than promote, foreign direct investment (FDI). Yet South Africa has a very low savings rate and urgently needs very much more FDI to help fund essential infrastructure, development, and job creation.
Moreover, the country cannot afford to put up further barriers to direct investment inflows at a time when net FDI has already turned negative. In 2014, outward flows exceeded inward ones by some R13bn while, in the first quarter of 2015, as Business Day records, “inward FDI recorded a negative R22bn…as foreign direct investors in South Africa pulled money out”. [Business Day 24 June 2015]
In addition, the most recent (2015) report by A T Kearney on the world’s 25 most attractive investment destinations saw South Africa drop out of this group altogether. In previous years, the country not only made it into the top 25, but also came in about half way up the index. (In 2014, South Africa was ranked 13th best, while in 2013 it came 15th and in 2012 it was rated in 11th place.)
A spokesman for A T Kearney blames South Africa’s recent exclusion from the index on a lack of “regulatory clarity”. In addition, other emerging markets in the top 25 showed “a willingness to engage in economic reform” and a more “entrepreneurial attitude”.
Undeterred by these developments, the Department of Trade and Industry (DTI) is now pushing for the adoption of this revised Investment Bill. According to the DTI, the Bill seeks to “clarify” and “codify” in South Africa’s domestic legislation “provisions typically found in bilateral investment treaties (BITs)”. In fact, however, the Investment Bill gives foreign investors very much less protection than most bilateral investment treaties provide – which is “prompt, adequate and effective compensation”, along with a right to international arbitration to settle disputes.
Under the Investment Bill, foreign investors will have to refer any dispute they may have with the South African Government to the country’s own courts – the very courts the ruling African National Congress (ANC) has been trying for many years to bring to heel. Though the current Bill makes some provision for international arbitration, it allows this solely on a “state-to-state” basis, so excluding the participation of affected investors. Moreover, international arbitration will be available only with the Government’s “consent”, and only if domestic remedies have been “exhausted” – a process that could take years.
Moreover, instead of “prompt, adequate and effective compensation” – a formula which promises the swift payment of market value at minimum – foreign investors will find their rights on expropriation governed by the Expropriation Bill of 2015 (the Expropriation Bill), now also before Parliament.
If adopted in its current (and unconstitutional) form, the Expropriation Bill will prevent South Africa’s courts from ruling on the validity of any expropriation. This Bill will also give investors a mere 60 days to sue on the compensation payable, failing which they will be “deemed” to have accepted whatever amount the Government has offered.
In addition, both South African and foreign investors confront not only the Expropriation Bill but also a host of other damaging bills and statutes that:
• significantly undermine property rights (examples include the re-opened land claims process, mooted ceilings on the size of farms, and a further bill aiming to vest all agricultural land in the “custodianship” of the State); and
• seek to bring about the regulatory or “indirect” expropriation of businesses, for which the Expropriation Bill will seemingly provide no compensation.
Indirect expropriation arises where the State itself does not acquire ownership, but regulation nevertheless deprives owners of many of the usual powers and benefits of ownership. One example is the Private Security Industry Regulation Amendment (PSIRA) Bill of 2012, still to be signed into law, which will require foreign security companies to transfer 51% of their equity to South Africans. Also relevant here are the revised BEE generic codes of good practice, which are already putting great pressure on many firms to transfer 51% of their ownership to BEE investors at heavily discounted prices.
All these laws make for an onerous and shifting policy environment. This, of course, erodes the regulatory certainty that investors require before they can prudently commit their capital and other resources to this country.
In addition, there are many practical obstacles to doing business in South Africa. Among these are the Eskom debacle; the country’s parlous education system (ranked fourth last in the world); its fractious labour relations (rated worst across the globe); its high input costs and limited competitiveness, its unemployment crisis and resulting social instability; and a public service so inefficient that this in itself has become one of the worst obstacles to doing business here.
Both foreign and local investors thus have good reason to give South Africa a wide berth. In erecting yet another barrier to FDI in the form of the Investment Bill, the DTI seems careless of the enormous hardship that limited investment and low growth are already causing and will continue to generate. This hardship falls most heavily on the 8.4m people now unemployed, who have diminishing prospects of ever finding work in the adverse business environment the Investment Bill (and other state interventions) are helping to bring about.
The Investment Bill is also a poor substitute for the bilateral investment treaties with mainly European nations that the Government remains intent on terminating. The Government claims that ending these treaties will help provide redress for apartheid injustices. However, the more likely effect will be to harm the disadvantaged by choking off new direct investment from European countries that have long been important sources of FDI into South Africa.
The Government may think that reduced FDI from the West can readily be replaced by fresh FDI from China and Russia on equally (if not more) favourable terms, but this will not in fact be easy to secure. At the end of 2013, FDI stock in South Africa from Western countries and Japan stood at more than R1 385bn, as opposed to a mere R59bn from China and very limited inflows from Russia. [South African Reserve Bank, Quarterly Bulletin, June 2015, pp92-95] Moreover, Western and Japanese FDI made up more than 86% of all FDI stock within the country, which then stood at close on R1 600bn. This means that FDI from the West and Japan cannot easily be replaced. In addition, both China and Russia now have worsening economic problems of their own, making it even more unrealistic for South Africa to rely on them to compensate for reduced Western FDI.
To restore the confidence of EU and other investors, South Africa needs to scrap the Investment Bill, reinstate the investment treaties it has already terminated, and give all European states, in particular, the assurance that the rest of the country’s bilateral investment treaties will remain in force. In addition, the Expropriation Bill needs to be fundamentally redrafted, so as to bring it into line with the property clause and other relevant provisions of the Constitution. (The IRR has drafted a revised expropriation bill that meets these needs, and a synopsis of its key parameters is attached, for the committee’s ease of reference, as Appendix 1.)
These steps would give the country a far more realistic chance of meeting the important goals set out in the preamble to the Investment Bill. The DTI is correct in noting the vital role that “investment plays in job creation, economic growth, development, and the well-being of the people of South Africa”. But the necessary investment is unlikely to be forthcoming if the Government continues on its present policy path.
At the very least, the Investment Bill needs to be scrapped, while the Expropriation Bill needs to be recast along the lines the IRR has proposed. Above all, the Government must do all within its power to reassure all potential investors – both direct and portfolio, local and foreign – that it is committed to upholding the Constitution, promoting economic growth, and making South Africa a highly attractive and competitive investment destination.
South African Institute of Race Relations NPC 25th August 2015
