Introduction
The Promotion and Protection of Investment Bill (“Bill”) was published for public comment on 1 November 2013. Interested persons may submit written comments to the Department of Trade and Industry by 1 February 2014. The Bill’s publication occurred against the background of the South African government’s decision to unilaterally terminate South Africa’s Bilateral Investment Treaties (“BITs”) with Belgium, Luxemburg, Spain, the Netherlands, Germany and Switzerland.
The government’s decision has stirred controversy and been criticised from various quarters (including the European Union’s Commissioner for Trade, Mr Karel De Gucht) especially as the European Union is South Africa’s largest trading partner and source of foreign direct investment (FDI). South Africa also has a Free Trade Agreement (FTA) with the European Union and an Economic Partnership Agreement (EPA) is currently being negotiated between the European Union and the Southern African Development Community (SADC), a regional body which includes South Africa. The Minister of Trade and Industry, Mr Rob Davies, has stated that the Bill will update and modernise South Africa’s legal framework for foreign investment and that BITs will be phased out.
Other countries (including Australia) are currently reviewing their BITs and investment policies and the United Nations Conference on Trade and Development (UNCTAD) has prepared an investment policy framework to assist countries in this regard. South Africa still has 45 BITs, of which only 17 (including with the UK, France, China, Italy, Nigeria, Zimbabwe, South Korea, Mauritius, Cuba and Malaysia) are currently in force. Of the remaining 28 (all of which have been signed), 17 are with African countries and the others include Canada, Russia, Israel and Turkey.
Although each BIT is a separate treaty between two contracting states and must be interpreted in accordance with its wording, there are essentially five core common principles –
“national treatment” i.e. investors from a contracting state will not be treated less favourably than locals;
“most favoured nation” status i.e. investors from a contracting state will not be treated less favourably than investors from a third state;
investments from a contracting state shall be subject to “fair and equitable treatment”;
investments by investors from a contracting state will not be expropriated or nationalised unless this is in the public interest and compensation equal to the fair market value of the investment is paid;
disputes between an investor from a contracting state and the other contracting state will be resolved by international arbitration; for example under the auspices of the International Centre for the Settlement of Investment disputes (ICSID).
Foreign investors from countries which don’t have a BIT with South Africa (like the USA, Japan and India) currently have no special protections. Happily for them, South Africa’s current investment regime does not unduly restrict or discriminate against foreign investors or unduly favour locals. Foreign investments above certain thresholds in certain sectors (like banking, insurance and broadcasting) require regulatory approval and there is a merger control regime under the Competition Act which applies equally to locals and foreigners but (unlike Canada and Australia) foreign investment is not subject to a general requirement for government approval. Like locals, foreign investors must comply with local laws including laws dealing with competition, tax, exchange control and Black Economic Empowerment (BEE) although foreign multinationals have the option (not available to locals) of scoring BEE ownership points through an “equity equivalent programme” without actually having a BEE shareholder (this allows them to maintain 100% foreign control of their South African subsidiary).
Provisions of the Bill
Ambit of Bill
The term “investor” is defined as anyone who holds an investment in South Africa “regardless of nationality”. The Bill accordingly covers both local and foreign investors.
The Bill contains a definition of “investment” in section 1 that –
requires the investment to relate to a “material” economic investment or “significant” underlying physical presence in South Africa (like operational facilities). The terms “material” and “significant” are not defined and will lead to interpretational issues. Moreover, if an investment is “immaterial” or “insignificant”, it is not covered by the Bill. Presumably, such investments would be left to be dealt with under local law but this lack of certainty as to whether or not an investment is covered by the Bill will be problematic for foreign and local investors and their advisors;
excludes commercial contracts for the sale of goods or services and the extension of credit in connection with such contracts. The reason for this exclusion is not explained but it allows the government to adopt procurement policies (for example by preferring locally-manufactured products) without being restricted by the Bill.
The Bill applies to investments made “for commercial purposes” (section 4(1)) – this is not defined but “non-commercial” investments would arguably exclude residential property purchased by foreigners for their own use from the ambit of the Bill. Section 5 adds further requirements for an investment to qualify for protection under the Bill, namely that it was made “in accordance with applicable legislation” and was “acquired and used in the expectation and for the purpose of economic activity or other business purposes”. Unfortunately no clarity is given as to how these requirements should be interpreted. For example would shares held by a foreign or local investor in a listed South African mining company qualify (how does one “use” shares)? These issues need to be resolved to prevent uncertainty.
Protection of sovereign rights of the South African government
The Bill is heavily focused on protecting the sovereign rights of the South African government to legislate in the “public interest”. Section 3 states that the purpose of the Bill is to promote and protect investment in “a manner consistent with public interest and a balance between the rights and obligations of investors” and to ensure equal treatment between foreign investors and South African citizens “subject to applicable legislation”. Section 4 states that the Bill does not preclude the operation of any South African domestic law. Section 5(3) states that the protection of foreign investment is subject to compliance with applicable domestic laws and international agreements. Section 10 expressly reserves the government’s right inter alia to redress “historical, social and economic inequalities”, to “promote and preserve cultural heritage and practices and indigenous knowledge”, to “foster” beneficiation, to “achieve the progressive realisation of socio-economic rights” and to protect “essential security interests”. Section 4(3) states that this may be done, inter alia, through taxation, government subsidies or grants and government procurement processes).
Qualified national treatment protection for foreign investors
Section 6 applies the BITs principle of “national treatment” in favour of foreign investors subject to certain qualifications. For example, it states that -
foreign investors will not be treated less favourably than local investors “in their business operations that are in like circumstances”. This effectively means that foreign investors may be discriminated against if there are no “like circumstances”. “Like circumstances” are vaguely defined as a “requirement for an overall examination on a case-by-case basis of all the terms of a foreign investment” – including the effect of the investment on South Africa, the sector and the “aim of any measure relating to foreign investments”. This qualification and “case-by-case” analysis is unclear and will lead to interpretational issues and uncertainty;
the national treatment will only apply to foreign investors and foreign investments “held in accordance with applicable legislation”. As the South African government unilaterally controls the content of “applicable legislation”, this provides a means to circumvent and neutralise the national treatment principle.
Provisions on security for foreign investments
Section 7 obliges the government to provide –
foreign investors with an equal level of security as that provided to other investors but this protection is “subject to available resources and capacity”; and
“subject to applicable domestic legislation”, equal treatment without discrimination to all investors (both local and foreign) if losses or damages are suffered due to war, armed conflict, revolution, a state of national emergency, revolt, insurrection or riot;
restitution or “appropriate” compensation to all investors (both local and foreign) for loss or damage due to the requisitioning or destruction of property by government “forces or authorities” if such destruction was not caused “in combat action” or required “by the necessity of the situation”.
The qualifications to these investor protections are unclear and will result in interpretational issues and provide a means to circumvent and neutralise the protections.
Expropriation and compensation
Section 8 provides that an investment may only be expropriated in accordance with the South African Constitution and in terms of a law of general application for “public purposes or in the public interests under due process of law” and against payment of “just and equitable” compensation (this is the test used in the Constitution). Such compensation must “reflect an equitable balance between the public interests and the interests of those affected”. The market value of the investment is just one factor to be taken into account (others include the current use of the investment, the history of its acquisition and use and the purpose of the expropriation). This is a crucial distinction between the Bill and the usual protections for foreign investors in BITs and under international customary law (which generally require the compensation to be the market value of the investment).
The term “expropriation” is also defined in a restricted manner in section 8 to expressly exclude –
a measure which has an “incidental or indirect adverse impact on the value of an investment”;
a measure “aimed at protecting or enhancing legitimate public welfare objectives such as public health or safety, environmental protection or state security”;
the issue of compulsory licences in relation to (or the revocation, limitation or creation of) intellectual property rights if this is “consistent with applicable international agreements on intellectual property”;
a measure which deprives an investor of property but where the State does not acquire ownership of the property provided that there is “no permanent destruction of the economic value of the investment” or the investor’s “ability to manage, use or control his or her investment in a meaningful way is not unduly impeded”.
This definition of expropriation is narrower than the definitions in the BITs and under international customary law. Section 8 also vaguely states that the above acts “are not limited” which compounds the uncertainty caused by the wide wording of these exclusions as it is not clear if other exclusions apply. The effect is that investors (both local and foreign) will not be entitled to compensation under the Bill if the exclusions apply.
No right to refer disputes to international arbitration
The BITs generally permit a foreign investor to refer an investment dispute with a government to international arbitration. This is of particular concern where the local courts and legal system is suspect (which is not the case in South Africa). From a government’s perspective, international arbitration is expensive and subjects the government’s policies to decision by an unelected outside third party. For example Philip Morris took the Australian government to international arbitration in terms of a BIT with regard to the government’s proposed plain cigarette packaging regulations. Awards can be significant (the award in the Occidental/Ecuador case was USD1.77 billion) and there is usually no right of appeal. Although arbitrators will apply international law (including the Vienna Convention on the Law of Treaties), there is no binding case precedent in international arbitrations and this may lead to inconsistent and contradictory awards. In the last decade there have been an increasing number of cases of foreign investors referring disputes with governments to international arbitration. In the Foresti case, the South African government’s decision to vest all mining rights in the state was subject to international arbitration under the BITs between South Africa and Italy, Belgium and Luxemburg (the case was settled in 2009).
Section 11 provides for a mediation process and also allows an investor to approach a competent court, tribunal or statutory body or refer a dispute to arbitration under the 1965 South Africa Arbitration Act (which is out of date and cumbersome in practice). It is not surprising (given the strong emphasis in the Bill on the South African government’s sovereign rights) that there is no provision allowing foreign (or local) investors to refer disputes to international arbitration. This is not prohibited by the Bill but the government’s consent would now be required and this is highly unlikely to be granted in practice. This is a major difference between the Bill and the BITs and means that disputes will (unless a BIT or international treaty applies to the contrary) now be determined under South African law and not international law. South Africa’s courts and legal system are however independent of government and generally uphold the rule of law. This provides some comfort for foreign investors.
Relationship between Bill and existing BITs and South Africa’s other international treaty commitments
The Bill covers foreign “investments” (as defined) made before or after the Bill’s commencement (section 4(1)). Section 2 however states that the Bill must be interpreted and applied with due regard to, inter alia, any convention or international agreement to which South Africa is a party. This arguably means that BITs that have not yet been terminated remain binding and override the Bill; i.e. investors from BITs countries will still benefit from the protections provided under the BITs. Those BITs which have been terminated by the government also continue to apply for between 10 and 20 years after termination (but only with regard to investments existing at termination and not new investments) and will accordingly override the Bill.
Furthermore, South Africa is party to the SADC Protocol on Finance and Investment, which came into effect in April 2010. The Protocol requires signatory states to give investors “‘fair and equitable treatment” and pay “prompt, adequate and effective” compensation (which arguably means fair market value) to foreign investors (this term is arguably not limited to investors from SADC member states) in the event of expropriation. It also provides an international arbitration remedy for foreign investors. The conflict between the Bill and South Africa’s obligations under the Protocol (which arguably override the Bill) raises interesting issues of interpretation and adds to the uncertainty as to the rights and remedies of foreign investors in South Africa. South Africa may withdraw from the Protocol on 12 months’ notice but, given the importance of SADC membership for South Africa, any such decision would not be taken lightly.
ConclusioN
The underlying motivation of the Bill appears more focussed on protecting the government’s sovereign rights than the rights of investors. This fits with the government’s policy to terminate BITs which potentially allow foreign investors to challenge government policy outside South Africa (as in the Foresti case referred to above). Investor rights and protections in the Bill are subject to qualifications which are often not clear and will lead to interpretational issues and uncertainty. However, on the positive side, the Bill does not impose new obligations on investors and does not implement a new regime to vet and approve all foreign investments (as exists in Canada and Australia).
The Bill has less of an impact on investors from countries which do not have BITs with South Africa (the Bill at least gives them some protection, albeit limited and qualified, that they did not previously have). For investors from countries with a BIT, the government’s new policy of terminating BITs is a significant change in the investment framework. When compared to the BITs, the Bill’s protections for foreign investment are much more limited and qualified – there is no right to fair and equitable treatment, no right to refer disputes to international arbitration and compensation for expropriation is not guaranteed to be the market value of the investment. The Bill may also be unilaterally amended by the South African government whereas a BIT can only be changed if both governments agree.
It is not clear what effect the termination of the BITs will have in practice but it already appears to have injured South Africa’s relations with the European Union and there may well be a chilling effect on investment flows from Europe (especially as investment risk insurance in some countries like Germany is conditional on a BIT being in place). However the existence of a BIT is not necessarily the most important factor in deciding whether or not to invest in a country. Other factors are equally if not more important; for example the availability of business opportunities, the level of return, the costs of doing business, the tax and exchange control regime, governance, labour relations, infrastructure (like reliable sources of electricity) and the regulatory framework in the relevant economic sector (especially the level of regulatory certainty).
BITs give preferential rights to investors from the contracting states when compared to locals and investors from countries which do not have a BIT with South Africa. The Bill is intended to implement a uniform investment protection regime in terms of which locals and all foreigners will be treated equally but is silent on the “most favoured nation” principle referred to above which means that foreign and local investors are not guaranteed protection against more favourable treatment granted to investors from other states (as is currently the case with South Africa’s remaining BITs). The continued application of BITs in practice (bearing in mind that most BITs will continue to apply after termination for between 10 and 20 years) however means that a uniform regime will only see fruition once all existing BITs have been terminated and cease to be of effect. This is accordingly a very long term goal and would also require the government to address the issues arising from the SADC Protocol discussed above.
BIT protections operate reciprocally but in practice much depends on the investment flow between the contracting states. All the BITs which have been terminated thus far have been with European countries. While investment flows between the European Union and South Africa are primarily from the European Union to South Africa, this is not necessarily the case in other countries; especially in Africa where South African business interests are heavily invested. Although Minister Davies has stated that BITs will be phased out, it is unclear how the government will treat BITs with African countries like Zimbabwe and Nigeria (where the BITs primarily protect South African investments) and the BIT with an important trading partner like China. BIT termination is a sensitive issue and its effect on bilateral relations needs to be carefully dealt with to avoid harming South Africa’s relationship with its BIT partners (as appears to have been the case with the termination of the European BITs).
It is generally accepted that South Africa needs more foreign direct investment and to attract investment, a clear and certain investment framework is vital. The Bill could be a step in that direction but unfortunately, as currently drafted, its qualifications and exceptions raise several interpretational issues and create uncertainty. The Bill is of course still in draft form and open for public comment. Hopefully the final Bill will balance the legitimate interests of investors with the interests of the government in a manner which actively promotes and maintains South Africa as a “first choice” destination for both local and foreign investors.
Written by Pieter Steyn, Director, Werksmans Attorneys