President Zuma and Trade and Industry Minister Rob Davies placed a lot of emphasis on South African investment opportunities at the recent World Economic Forum in Davos, reassuring investors that South Africa is open for business. What President Zuma did not mention to the Forum was that on the 13th of December 2015 he signed into law the controversial Protection of Investment Bill. The Act will come into operation on a date determined by President Zuma by proclamation in the Government Gazette and signals a big change in South Africa’s investment protection policy for foreign investors, particularly with regard to expropriation.
Government indicated back in 2010 that it intended to change its investment protection policy, after it undertook a review of existing bilateral investment protection treaties (BITs). This review came after South Africa’s Black Economic Empowerment (BEE) policies were challenged by investors in international arbitration in terms of existing BITs. The Department of Trade and Industry announced that it would strengthen investor protection by codifying the provisions of the various BITs South Africa have in place with other countries into a single piece of legislation. Government felt that BITs and international arbitration thereunder posed unacceptably high risks to its legitimate and sovereign right to regulate in the public interest. A number of EU member countries, including Belgium, Denmark, Germany, Luxembourg, Spain, Switzerland and the Netherlands were nevertheless surprised when the South African government, without any prior notice or warning, refused to renew their existing BITs at the beginning of 2012. While South Africa receives substantial foreign direct investment (FDI) from countries that it does not have BITs with, the bulk of South Africa’s FDI comes from these countries whose BITs were terminated.
BITs are typically in force for a period of ten to twenty years from their conclusion, whereafter the normal practice is for parties to the BIT to simply renew the agreement for a further period. Most of these agreements however do contain a grandfather clause providing that even where the agreement is terminated, all investments made prior to the date of termination shall continue to enjoy the protection of the BIT for a further period of twenty years. While this still provides relief for existing foreign investors in South Africa, the government’s move did not do much for attracting new foreign direct investment as investors require regulatory certainty and predictability as prerequisites before considering new investments.
One of the main attractions of BITs for foreign investors is the fact that they provide investors with an alternative dispute settlement mechanism in the form of international arbitration, often under the auspices of the World Bank’s ICSID (International Centre for the Settlement of Investment Disputes). This type of arbitration is referred to as investor-state dispute settlement and for obvious reasons is preferable to having to sue the host State in its own courts. Investor-state dispute settlement has in the past couple of years been receiving a lot of criticism for being too investor focused, especially by governments that have lost a number of big cases. Many developing and developed countries are as a result reviewing their investment protection policies to ensure that they are more balanced, however, the general international consensus is still that investor protection policy should provide for international dispute settlement.
The introduction of the Promotion and Protection of Investment Bill in 2013, the precursor to the Investment Protection Bill, caused further uncertainty for existing investors. While the purported aim of the Promotion and Protection of Investment Bill was to modernise and strengthen South Africa’s policy approach to foreign investment, both the Promotion and Protection of Investment Bill and the latter Protection of Investment Bill were heavily criticised as they watered down investors’ rights to seek redress in the case of expropriation of their investments. This, together with the doubtful constitutionality of the Expropriation Bill that was released in 2015, has been a serious cause for concern for foreign investors.
The biggest concern is that foreign investors, in the case of expropriation of their investments, no longer have recourse to investor-state dispute settlement in the form of international arbitration. The Protection of Investment Act now prescribes domestic mediation as a first step, provided the investor and the government can agree on the appointment of the mediator. The only other alternative for investors is to approach the domestic courts, a process which could take years with no guarantee of success. While the Act contains a provision for the government to consent to international arbitration, this is subject to the exhaustion of domestic remedies and to the arbitration being state-to-state arbitration as opposed to investor-state arbitration.
The Department of Trade and Industry claims that there is either a very weak, no or a negative correlation between investment inflows and BITs. In contrast, the United Nations Conference on Trade and Development (UNCTAD) recently published a report entitled the Global Investment Trends Monitor which shows that in 2015 FDI into South Africa fell by 74% to a paltry $1.5bn. While the rest of Africa also saw investment flows drop by 31.4% in the same year, the dramatic drop in South Africa’s investment flows should be a cause for concern. Where we have assisted foreign investors into Africa in the past, investment protection has always been one of their main concerns.
The importance of BITs for foreign investors was also illustrated by the situation in Zimbabwe, where over the last couple of years most South African investors completely pulled out of Zimbabwe, but immediately considered investing in Zimbabwe again after the signing of the Bilateral Investment Promotion Agreement (BIPA) between South Africa and Zimbabwe. South African investors made it clear that they would only reconsider investing into Zimbabwe if the BIPA contained recourse to international arbitration, after which the Zimbabwean government agreed to include international arbitration in the agreement.
In the light of the above it is clear that unless South Africa reviews and improves its investment protection policy, it is unlikely to see FDI levels recover in the near future.
Niel has a BCom LLB LLM (International Trade Law) from the University of Stellenbosch, a Masters of International Law and Economics (MILE) (Switzerland) and an International Legal Studies Certificate (Amsterdam). Niel was admitted as an attorney in 2009 after completing his articles at Bowman Gilfillan, whereafter he co-founded Trade Law Chambers, specialising in international trade and investment law. Niel joined Caveat Legal in 2015.