South Africa’s approach to the implementation of its Investment Policy Framework by Mustaqeem De Gama & Rafia De Gama*

  1. Background

In July 2010[1], the South African Cabinet adopted a new investment policy framework which was aimed at modernising and strengthening the country’s investment regime.[2] Five core measures were mandated by Cabinet for the implementation of the new policy framework: (i) development of foreign investment legislation;[3] (ii) review and termination of existing old generation BITs; (iii) development of a new model BIT; (iv) BITs will only be entered into on the basis of compelling economic and political reasons; and (v) the establishment of an Inter-Ministerial Committee (IMC) to oversee the implementation of these measures.

The policy position taken above was informed by a review of South African BITs that was conducted from 2008-2009[4] which assessed BITs that were entered into around the time of the political transition from apartheid to a new democratic dispensation in South Africa. Prior to 1994, the RSA had no history of negotiating BITs and as a result the risks posed by such treaties were not fully appreciated. Most of the BITs were concluded with European countries. While it was understood that the democratically elected government had to demonstrate that the Republic of South Africa was an investment friendly destination,[5] the impact of BITs on future public policies, particularly policies mandated by the Constitution, were not critically evaluated. [6]

2. Approach to the termination of BITs

2.1 Introduction

South Africa is currently terminating BITs[7] that have reached their termination dates in line with the investment policy framework. BITs, like any other agreements, have time limits during which they apply. International law recognises the right of partners to an international agreement to terminate such treaties. The Vienna Convention on the Law of Treaties, under Article 54, provides for the termination of a treaty. Article 54(a) and (b) reads as follows:

“The termination of a treaty or the withdrawal of a party may take place:

(a)   in conformity with the provisions of the treaty; or

(b)   at any time by consent of all parties after consultation with the other contracting States.”

All the RSA BITs that have entered into force make provision for procedures of termination. South Africa is allowed both in terms of the provisions of the BITs and international law to terminate such treaties. The decision to terminate BITs is closely related to the assessment that South African domestic law provides adequate guarantees to all investors, their investment and returns on investment. Nonetheless, BITs also contain so-called survival clauses that determine that the substantive protections of the treaty will continue to apply to investments made before termination. These periods differ from agreement to agreement and may be as long as 20 years.

2.2 Process of termination

Various concerns have been raised about BITs in general and the negative impact that such agreements have on the ability of governments to regulate in the public interest. Given the history of South Africa, there are various constitutional and international law obligations that compel the South African government to implement a programme of redress in order to address past discriminatory practices.[8] Governments must retain the necessary policy space to implement legitimate public policy objectives. This is so regardless of whether the investor affected by such measures is foreign or local. Incidental adverse effects of such measures should not give rise to the duty to pay compensation where the measures are bona fide and non-discriminatory.

To date South Africa has given notices of termination in respect of the Belgo-Luxembourg BIT on 11 September 2013 (this BIT terminated on 13 March 2013), the Spain BIT on 20 June 2013 and the Dutch BIT on 31 August 2013. It is understood that the above-mentioned BITs were targeted due to the tacit renewal clauses present in these BITs, while the Italian and Greece BITs have already automatically renewed. South Africa has engaged the European Union in order to discuss its rationale for the termination of BITs and also to clarify national norms that will apply to foreign investment in the future.  The transfer of investment competence under the Lisbon Treaty from EU member states to the Union has resulted in a situation where the re-negotiation of current individual BITs was perceived not to be feasible for South Africa. BITs with other countries that have also reached their termination dates include China, Korea, Mauritius and Argentina. There are currently processes underway with all countries whose BITs have reached their termination dates, but factors specific to European BITs required a different approach in contradistinction to the so-called non-European BITs.

It is pertinent to observe that South Africa receives investment from countries with which it has no BITs, including the United States of America, Canada and Japan. South Africa has recently published a bill for public comment on the protection and promotion of investment. The draft Promotion and Protection of Investment Bill includes various guarantees that codify international investment law concepts into South African law.

2.3 Approach to European BITs in light of the Post Lisbon dispensation

2.3.1 Introduction

It has been indicated that even though BITs may be terminated, existing investments under such BITs may still be protected by a survival clause. The old European BITs have been grandfathered under the EU transitional regulation and will continue to apply to existing investments for a period of up to 20 years. In the absence of a new investment agreement with the EU all European investments will be protected under the domestic law of South Africa.

2.3.2 The Emperor has new clothes?

The Treaty of Lisbon[9] entered into force on 1 December 2009 and replaces the “Nice Treaty” bringing substantial changes for the EU, both with regard to its policies and the procedures under which the EU is operating. The Lisbon Treaty shifts the competences between the EU and its member states in the field of foreign direct investment (FDI) towards the EU. In light of the changing legal landscape for investment and the lingering uncertainties in Europe, South Africa decided not to wait for the European Union but to forge ahead with the implementation of the Cabinet Decision of 2010.

Brussels’s approach to investment agreements now also revolves around negotiating investment protection chapters as part of so-called free trade agreements. South Africa, along with other members of the regional group, rejected the inclusion of investment rules in the Interim SADC-EU Economic Partnership Agreement (EPA) of 2007, and has continued to oppose such an approach in line with the Southern African Customs Union (SACU) negotiating mandate. The issue of investment protection has also not been mooted within the current EPA negotiating framework.

There is a perception that that European investments will be worse off once BITs are terminated since there is no clear framework for the protection of investment. This view is clearly not aligned to the reality that South African domestic law offer robust protections to investors and their investments, possesses independent and impartial courts and has a tradition that upholds the rule of law celebrated through a voluminous edifice of case law to this effect.

2.4 Implications of termination of BITs for South African investors

South Africa is both a capital importer and exporter and some commentators have suggested that the termination of BITs will impact negatively on South African investors, especially in Africa. South Africa is the 5th largest holder of FDI in Africa at 18 billion USD and the second largest developing country investor after Malaysia.[10] It is argued that South African investors on the African continent are vulnerable if no new BITs are negotiated to protect such investments.  There is no clear evidence to support this contention. Various options exist for South African investors who may be affected by government actions in the jurisdictions where they invest, including the use of investment contracts with arbitration clauses, export insurance and political risk cover.[11] South Africa is also a member of the Multilateral Investment Guarantee Agency (MIGA) through which South African investors can obtain cover for inter alia expropriation, currency inconvertibility and transfer restrictions, breach of contract and the non-honouring of financial obligations.

3. Conclusion

Recently South Africa moved to further clarify the position of foreign investors through the publication of the draft Promotion and Protection of Investment Bill on 1 November 2013.  This bill emphasises the rule of law as a critical element of the constitutional dispensation in South Africa and takes a non-discriminatory approach to all investment. It also clarifies core international investment law concepts in line with the South African Constitution.

The decision to terminate BITs has been subject to a long period of public debate and is supported by extensive research and consultation. South Africa offers effective and robust investor protection under its domestic legal system and within the context of the SADC FIP.  The criticism directed at South Africa for terminating BITs with European countries is unwarranted since the termination process has been conducted within the parameters of the applicable treaty provisions as well as international law and with due consultation. Similarly, South Africa has also engaged with non-European BIT partners to discuss approaches to investment treaties that have reached their termination dates. Factors unique to European BITs are entirely absent from these non-European BITs and as such these BITs require a different approach. Although South Africa has taken a decision to terminate existing BITs, the Cabinet Decision of 2010 authorises the conclusion of new investment agreements based compelling economic and political reasons in line with a model BIT.  This approach will necessarily move away from investor-state to state-to-state arbitration, with narrower definitions of core concepts usually found in such agreements as well as a greater emphasis on the right to regulate in the public interest.


* Mustaqeem De Gama (Director: Legal: Trade and Investment, DTI) & Rafia De Gama (Lecturer at the University of South Africa).  The views expressed in this contribution are the personal views of the authors and cannot be attributed to the respective institutions.

[1] Statement on the Cabinet meeting of 20 July 2010, Government Communications (GCIS), available at <http://www.gov.za/speeches>.

[2] In July 2011, Cabinet instructed that National Treasury (NT) continue work on a review of South Africa’s inward investment policy framework in collaboration with relevant departments, the Cabinet Statement may be found at <http://www.gov.za/speeches>. This work was initiated by the NT paper “A financial surveillance framework for cross-border direct investment in South Africa.”, and may be found at the following link: <http://www.treasury.gov.za/documents/national%20budget/2011/A%20review%20framework%20for%20cross-border%20direct%20investment%20in%20South%20Africa.pdf>

[3] The debate around the extent to which foreign investment should be regulated has resulted in a “two-stream” process which captures the 2010 Cabinet decision in respect of the translation of international standards of protection into South African law and the NT proposed surveillance mechanism to oversee cross border investment flows in line with the Cabinet decision of July 2011.

[4] This review resulted in a position paper entitled: “Bilateral Investment Treaty Policy Framework Review.” (June 2009) and can be found at <http://www.pmg.org.za/policy-documents/2009/06/25/bilateral-investment-treaty-policy-framework-review>

[5] Luc Eric Peterson “South Africa’s Bilateral Investment Treaties: Implications for Development and Human Rights.” (2006) Friedrich Ebert Stiftung Dialogue (FES) on Globalisation Occasional Paper No. 26 pp. 1 – 43 at 6.

[6] In the ICSID case of Piero Foresti v The Republic of South Africa (Case No ARB(AF)/07/1) the claimants challenged the Mineral and Petroleum Resources Development Act No 28 of 2002 and in effect the transformation mandate of the South African Government regarding the eradication of past discriminatory race based measures in the mining sector.

[7] Copies of the various BITs may be obtained from the website of the Department of International Relations and Cooperation at the following address: <http://www.dfa.gov.za/chiefstatelawadvicer/treatysection.html>.

[8] The Republic of South Africa has the legal obligation to wipe out all legal and material consequences of apartheid, this obligation having achieved peremptory norm status under international law. Article 3 of the International Convention on the Elimination of All Forms of Racial Discrimination (CERD) provides that: “States Parties particularly condemn racial segregation and apartheid and undertake to prevent, prohibit and eradicate all practices of this nature in territories under their jurisdiction.” (emphasis added).

[9] Treaty of Lisbon amending the Treaty on European Union and the Treaty establishing the European Community, signed at Lisbon, 13 December 2007 (2007/C 306/01).

[10] “The Rise of BRICS FDI in Africa.” Global Investment Trends Monitor (UNCTAD), 25 March 2013, pp. 1-10 at 9.

[11] Export Credit Insurance Corporation (Pty) which is a government agency provides insurance cover on risks associated with investments and loan finance for capital goods and services projects in foreign countries

 

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