The main concern for any foreign investor is security of tenure for its investment. Investors generally feel threatened when governments promote policy changes that could potentially have an adverse effect on the rights and legitimate expectations they enjoy. In order to encourage foreign direct investment (FDI) and to provide foreign investors with the comfort that their investments are protected, countries often conclude bilateral investment treaties (BITs), which offer certain protections to investors, for example against expropriation or unfair treatment.
South Africa is expected to publish a revised Investment Bill in early 2015 to replace the BITs it previously entered into. This is likely to have significant implications for the investment protection framework in South Africa and more generally for the debate on investment protection worldwide.
Investment protection in South Africa
South Africa has concluded a number of BITs with the countries it has trade and investment relationships with. These BITs contain provisions which prohibit the expropriation of investments made by foreign nationals in South Africa, save if such expropriation is "for a public purpose or in the national interest" and accompanied by "immediate, full and effective compensation". Any expropriation of an investment of a foreign national by the South African government would be open to a potential claim for breach of its BIT obligations should such expropriation fail to comply with the terms and conditions for a lawful expropriation as contained in the relevant BIT.
However, a policy decision has been taken by South Africa to terminate the majority of its BITs (pursuant to the terms of such BITs). The decision was prompted by a policy review of the actual value of BITs for FDI flow to South Africa and also the risk that certain policy and domestic interventionist measures may be open to attack by foreign investors (including black economic empowerment and procurement policies).
A prime example of this was following the enactment of the Mineral and Petroleum Resources Development Act, 28 of 2002 (MPRDA), when foreign investors from Luxembourg and Italy came to regard the MPRDA and the black empowerment requirement for mining rights as a form of expropriation of their common law entitlement to exploit and mine minerals. These investors initiated arbitration proceedings against South Africa under the auspices of the International Centre for the Settlement of Investment Disputes (ICSID) during 2006, alleging that South Africa was in breach of article 5 of its BITs with Italy and Luxembourg, which prohibited expropriation. In the end, a settlement was reached, which precluded deciding the matter on its merits.
The Investment Bill
The policy decision by South Africa to terminate its BITs constitutes a challenge to the manner in which investment protection is traditionally guaranteed by host states. South Africa's intention is that foreign investments will in future be protected through domestic legislation, i.e. the draft Promotion and Protection of Investment Bill 2013, which was released for public comment on 1 November 2013. As part of the decision to regulate the protection and promotion of investments domestically, South Africa has served termination notices on approximately 13 states it has BITs with, most of which were close to the end of their respective duration dates and up for renewal.
The termination of South Africa's BITs, however, does not mean the termination of all investment protection obligations and mechanisms for existing investors. All existing investors would continue to be protected by the "sunset or survival" clauses contained in the majority of BITs, which usually have a sunset period of between 10 to 15 years. Further, South Africa will still be subject to its obligations under the Southern African Development Community Protocol on Trade and Investment 2006, which provides that member states (including South Africa) must create a "favourable investment climate" for investment in the Southern African Development Community by among others actions (a) not expropriating investments, except for a public purpose against prompt, adequate and effective compensation, and (b) allowing access to international arbitration to foreign investors. The Investment Bill may be a deviation from South Africa's obligations under the Protocol.
The Investment Bill would incorporate a number of international trade law principles usually found in BITs into South African domestic legislation to ensure that all investors (whether foreign or national) are treated equally to the greatest extent possible. All interested and affected parties had until 31 January 2014 to provide the South African government with comments on whether the proposed Investment Bill would provide sufficient legislative protection to foreign investors in its current form.
The Investment Bill received a significant amount of criticism, specifically relating to:
- The limitation of compensation in the event of an expropriation by the South African government to the level prescribed in the South African Constitution, as opposed to the "immediate, full and effective compensation" standard usually found in BITs. One of the concerns resulting from this is that foreign investors will not be guaranteed compensation at full market value in the event of an expropriation. This is because the Constitution provides, among other things, that the amount of compensation and the time and manner of payment must be deemed just and equitable, reflecting an equitable balance between the public interest and the interests of the foreign investor. Market value is taken into account, but the compensation does not necessarily comprise the full market value.
- A foreign investor who has a dispute with the South African government relating to its foreign investment in the country will be limited to domestic dispute resolution mechanisms such as a mediation with the state, domestic court action or an agreed domestic arbitration. A foreign investor will have no recourse to any international arbitration or other neutral forum to resolve the dispute, except if such dispute arises during the sunset period of the BITs in relation to an investor protected by such agreement.
The Investment Bill is challenging the status quo in respect of how foreign investment protection and promotion is done in international trade. The termination of BITs and the concerns relating to international arbitrations by states when domestic policies are changed to achieve certain economic and social objectives are not just a South African phenomenon. Bolivia, Ecuador and Venezuela have all withdrawn from the ICSID Convention (in 2007, 2009 and 2012 respectively) and Indonesia and Australia have also raised concerns in relation to international dispute resolution mechanisms which challenge certain sovereign state policy decisions. The South African government's view is that there is no real correlation between BITs and the FDI flow to South Africa and that, overall, BITs are a greater harm to the country's developmental objectives.
Despite public comments submitted to the government on the Investment Bill by the end of January 2014, there have been no further developments on the bill this year. It is now anticipated that a revised Investment Bill will be released in early 2015.
Should the Investment Bill be passed in its current format, there is speculation that it may discourage future investment in South Africa; however, it is difficult to say whether that will actually be the case having regard to concerns other jurisdictions also have with certain of the provisions of existing BITs. The question is whether domestic measures (similar to the Investment Bill) for the protection of foreign investors could become the norm for other countries concerned with the actual benefit of BITs in promoting reciprocal trade. A proper cost benefit analysis would have to be done by each country to ascertain whether BITs still serve the purpose for which they were originally concluded.
*Based in Johannesburg, Jackwell Feris is a director of DLA Cliffe Decker Hofmyer’s Dispute Resolution practice. Reach him here.