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Limit on foreign ownership of private SA security firms unlawful – expert

Photo by Bloomberg

13th May 2014

By: Natalie Greve
Creamer Media Contributing Editor Online

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The provision in the proposed Private Security Industry Regulation Amendment Bill, which limits foreign ownership by private security companies to a maximum of 49% and has yet to be signed into law by President Jacob Zuma, could be in breach of South Africa’s obligations under international law, trade law expert JB Cronje has asserted.

The most notable of these legal obligations were the General Agreement on Trade in Services (GATS) of the World Trade Organisation (WTO), the Protocol on Finance and Investment (FIP) of the Southern African Development Community (SADC) and the existing Bilateral Investment Treaties (BITs).

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Foreign-owned security firms operating in South Africa include Securitas, ADT and Chubb, which made up less than 10% of the entire private security industry in South Africa, which employs some 50 000 people.

Speaking at security industry trade exhibition IFSEC on Tuesday, Cronje said, given the concerns regarding the challenged provision in terms of South Africa’s international obligations, Zuma could still find it necessary to refer the Bill back to the National Assembly for reconsideration.

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“As a Member of the WTO, South Africa must fulfil in good faith all the obligations assumed by it under the various WTO agreements, including the GATS.

“Under GATS, South Africa has undertaken commitments in a number of services sectors with respect to foreign services and foreign services suppliers. There is a particular commitment which provides that the country shall not maintain or introduce measures that would limit the participation of foreign capital in terms of maximum percentage limits on foreign shareholding, the total value of individual or aggregate foreign investment,” he commented.

Cronje added that imposing restrictions on the ownership of foreign-owned security companies violated South Africa’s GATS commitment not to introduce measures that would limit the participation of foreign capital.

“In particular, I believe that the ownership limitation clause would violate South Africa’s market access commitment on the establishment of foreign services suppliers.

“The country’s GATS commitments are legally binding. It is clear from the minutes of the Parliamentary Portfolio Committee on Police during deliberations on the Bill that the government is aware of the State’s GATS obligations and the imminent breach, but have gone ahead with it anyway,” he said.

Cronje also believed that the foreign ownership limitation clause was likely to be in breach of the Protocol on FIP of the SADC region, which South Africa, as a member of SADC, had ratified.

Article 3 of the FIP provides that State parties must “coordinate their investment regimes and cooperate to create a favourable investment climate in the region, as set out in Annex 1”.

The Annex applied to any investment in the territory of a host State, regardless of the nationality of the investor, which was defined as a legal or natural person “that has been admitted to make or has made an investment.”

South Africa did not have legislation regulating the admission of investment. 

“The Annex lacks a provision on national treatment that would oblige South Africa to treat foreign investors no less favourably than nationals engaged in similar business activities. But the Annex does include other provisions on the treatment of investors, including fair and equitable treatment clauses,” Cronje noted.

Moreover, it also contained provisions on investment protection, providing for prompt, adequate and effective compensation in the case of nationalisation or expropriation and contained a prohibition on State parties to “arbitrarily and without good reason amend or otherwise modify to the detriment of investors, the terms, conditions and any benefits specified in the letter of authorisation” of an investment.

However, Article 14 contained a general exception provision, which preserved the right to regulate in the “public interest” to ensure “investment activity is undertaken in a manner sensitive to health, safety and environmental concerns”. 

Looking to BITs, which were usually concluded between two States on a bilateral level in which they agreed to offer certain standards of treatment to each other’s nationals, Cronje said their content and obligations usually varied on the treatment they provided to foreign investors, their provisions on investment protection and dispute settlement mechanisms.

South Africa had concluded BITs with almost 50 countries, including the UK, Italy, Switzerland and Sweden and, as with the GATS and FIP, he added that foreign ownership limitation was likely to be in breach of relevant BITs.

“In general, investment protection provisions give investors the right to transfer investment funds out of the host country and to receive compensation for losses owing to expropriation, armed conflict, revolution, or revolt in the host country.

“At a time when one of the arguments used to support the draft Promotion and Protection of Investment Bill is that foreign investment will be sufficiently protected from forced transfers of property rights by the South African legislation, such forced transfers can result in hastily adopted amendments to legislation,” Cronje concluded.

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