South Africa’s Foreign Investment Regulation: A revisit, by Azwimpheleli Langalanga*

History of South Africa’s BIT regime

South Africa emerged from international isolation in 1994 after ushering in a majority governance system. It was the last country in the African continent to gain freedom. Most countries which had gained independence during the decolonisation period had engaged in economic nationalism. In Southern Africa, Zambia was one of them. South Africa as the last African country to attain political freedom had to signal to the world and foreign investors in particular that it was a safe investment destination.[1] This was because as a new country with its kind of history and neighbourhood, there was a general apprehension that it might descend into anarchy and disrespect for property rights. The best way to make a firm signal and commitment to the world that the new South Africa would respect property rights was through entering into bilateral investment treaties. It is important to note that South Africa had to enter into these investment agreements as there was no other system in place to safeguard foreign investments. South Africa was still negotiating a constitution, which later came into effect in 1996.Most of South Africa’s bilateral investment treaties with capital exporting countries were negotiated and signed before the advent of South Africa’s current constitution. This is important to note as one of the South African government’s reasons for the termination of bilateral investment treaties is that any renegotiation has to take into consideration of its constitution and particularly the transformation agenda. The bilateral investment treaties which South Africa entered into followed the OECD template. They were generally aimed at protecting and promoting foreign direct investment. Government was left with little policy space.

South African Constitution and Foreign Investment

South Africa entered into bilateral investment treaties before its current constitution[2] came into effect. The South African Constitution makes reference to international and foreign law in its interpretation clause.[3] Section 25 of the same constitution comes closest to guaranteeing the protection of foreign investment.[4] This provision deals with the protection of private property and spells out the conditions under which property might be expropriated and the amount of compensation to be paid. Property rights are entrenched in the constitution. Private property can only be expropriated through a law of general application. The compensation to accompany such an expropriation is one which is just and equitable. South Africa’s constitution therefore shies away from a strict Hull Formula inasmuch as it does not provide for a Calvo doctrine.[5] The BITs which South Africa entered into with most of the EU member states and other capital exporting countries provide for a stricter protection of investment. The compensation is usually that provided in the Hull Formula. In addition to broader provisions on compensation and expropriation, the South African constitution also captures one of the most defining policies of its political economy. This is the transformation agenda. South Africa in a bid to address the economic imbalances borne by apartheid has put in a raft of performance requirements measures. These performance measurements permeate all the facets of the South African economy. Both foreign and local investors are therefore supposed to implement equity measures which include employing a certain number of people of colour, having a certain percentage of shares owned by black people, and having people of colour in management positions etc.

South Africa felt there was a need to review its BITs network in order to align it with its constitution and moreso accommodate its black economic empowerment program.

South Africa’s BIT framework Review

Currently, South Africa has a very open FDI regime. It does not control inward investment in any way except for competition regulation purposes especially in mergers and acquisition. The regulation by the competition authorities is mainly aimed at local investors. A great example of this was in the Wal-Mart/Massmart takeover when the competition authorities got immensely involved. There was however, a realisation by South Africa, that its BIT framework resulted in a  regulatory freeze.It was upon this realisation that a  decision was taken  to review all the agreements which South Africa  had concluded in the early to mid-nineties. It took a decision to review all BITs in place in 2007.The review was triggered by the realisation that BITs actually had teeth and that they could be used to curtail its policy space and particularly the black economic empowerment program. The biting nature of the BITs was reflected in two cases which were taken to international arbitration. This process of reviewing BITs was concluded in 2010.It is a process which can be placed within a global review context in which second generation BITs were being reviewed by major countries including capital exporting countries.[6] South Africa’s review can be best understood when read within a global context. The review coincided with the general global disenchantment with the international investment agreements regime starting with the NAFTA decisions and those emanating from the Argentinian “pesification” judgments.


The review of South Africa’s bilateral investment treaty framework made a finding to the effect that there was generally no relationship between BITs and FDI attraction.[7] A finding was also made to the effect that the South African constitution by and large had room for the protection of private property including foreign investments. Perhaps the most important finding from the review was the confirmation that the BITs to a large extent curtailed the government’s policy space. This related mostly to the fact that the black economic empowerment program, which forms the bedrock of the government’s macro-economic and social transformation policy was not excluded from the application of BITs. After making these findings a couple of recommendations to remedy the situation were mooted and these have informed the apprehension which has seized international investment lawyers, the EU and foreign investors.[8] This is because of the ambivalence on investment policy they have created.

Recommendations from the Review

The review of South Africa’s bilateral investment treaty regime resulted in a plethora of recommendations. Some of the recommendations made sense while others are too ambitious if not disconcerting. Flowing from the general finding that the BITs concluded in the early to mid-nineties constrained government policy making space was a recommendation that all first generation BITs should be terminated as they efflux and be renegotiated. Another recommendation was that the government will have to refrain from entering into any new bilateral treaties unless there are compelling factors. What constitutes compelling factors has never been explained. A recommendation was also made to the effect that a new model BIT be developed. Finally, a recommendation was made that the provisions in the current BITs including provision for government regulatory space be encapsulated in a new Foreign Direct Investment Act. In order to realise these recommendations, the government went as far as establishing a Ministerial Committee. What emerges from a holistic reading of the recommendations is the fact that they are not coherent. The recommendations talk past each other. This ambiguity creates a lot of anxiety in the international investment community.

Termination of BITs

The South African government has implemented the recommendation to terminate all first generation BITs to the European Union and international investors’ great alarm. Firstly, South Africa was perceived to be targeting the EU. However, this was because most of the BITs concluded in 1995 were with the major capital exporting countries of the EU. Naturally, the BITs with EU member states were expiring and South Africa just took a decision not to renew them. These BITs remain in force for at least fifteen years after termination. It could be argued that investors then need not to worry about South Africa’s termination of BITs. That argument would be flawed. The problem with South Africa is that it is not putting a coherent alternative to the terminated BITs. It is not clear whether what will come in lieu of terminated BITs are renegotiated and updated BITs, none BIT regime or a BIT regime characterised by none ISDS dispute settlement system. Another interesting twist to this already hazy South African approach to future regulation of FDI is an envisaged domestic legislation on the issue.

The South African FDI Bill

South Africa’s much anticipated and aptly titled Protection and Promotion of Investment Bill was gazetted for public comment on the 1st of November 2013.The FDI bill is meant to usher in a new era in South Africa’s investment regulation. An era in which South Africa will regulate investments outside the international investment law arena. An analysis of the Bill from an international investment law and policy lenses reveals quite a lot of disturbing provisions. The main objective of the Bill is to balance the interests of investors with those of the state. It can be recalled that South Africa’s thinking is in line with the global new generation BIT movement. The only difference is that South Africa intends to remove international investment regulation from the international arena to its domestic sphere. South Africa’s Promotion and Protection of Investments Bill raises a lot of worrying issues. These relate inter alia to: linking investments to economic activity,[9] putting the Constitution above customary international law,[10]removing the right of establishment,[11] not recognising indirect expropriation,[12]the conflicting compensation standards,[13]and a wide public interest provision.[14]The Bill in many respects seems to violate international investment law principles. It states that the law will protect an investment which contributes to economic activities a codification of the Salini test.[15]In addition the Bill provides that it must be interpreted in accordance with the constitution and in cases where there is an inconsistency between the constitution and customary international law, the former shall take precedence. This may pave way for interpretations and applications of the bill which are inconsistent to customary international investment law principles such as indirect expropriation. The bill also codifies the disturbing reasoning in AgriSA v Minister of Energy [16]where the Constitutional Court made a finding to the effect that indirect expropriation was not part of South African law. Further, the Bill codifies both the Hull formula and the Calvo doctrine. This will definitely pose a lot of problems in interpretation. Ultimately, the bill does not do justice to the legitimate call by governments to have more room for regulation as it has an expansive public interest provision. The regulation in the public interest provision is so expansive that it can include anything from black economic empowerment to beneficiation of minerals. How South Africa’s FDI bill will fit into a regional matrix is still to be seen. South Africa is a signatory to the Finance and Investment Protocol which contains OECD BIT type provisions.[17] This is in addition to the SADC Model BIT which South Africa was instrumental in its drafting.[18]

Comparative Analysis

South Africa, in justifying its BIT review and the attendant recommendations tends to point to the fact that other countries such as Norway, Canada, the US, Australia etc. are also engaged in the same processes. For instance, South Africa has threatened to do away with ISDS citing the fact that Australia is taking a similar route. In the same vein, it has argued that it will terminate and not renew its BITs as Brazil which is its counterpart in the BRICS grouping has no single investment agreement in force but continues to attract foreign investment. This attitude ignores the political economic peculiarities of South Africa vis-vis its comparators. South Africa is a young African democracy which has an economy characterised by huge inequalities. While it has a strong and vibrant institution, these have not yet been tested to the limit. They might be overwhelmed by a populist regime thriving on economic nationalism. South Africa offers fertile ground for such a scenario if it does not address its social and economic disparities. Zimbabwe will always be at the back of the minds of foreign investors when dealing with South Africa. South African exceptionalism offers cold comfort in this regard. The FDI bill as gazetted does not help in alleviating fears of South Africa turning into a Zimbabwe.


South Africa like most developing countries entered into a series of bilateral investment treaties based on the OECD template with a view to attracting foreign investment. It was even under more pressure to do so as it had just emerged from international isolation and wanted to signal to the world its exceptionalism, being in a continent where the rule of law was scantily applied. Like all other countries which had indiscriminately entered into BITs, it was to dawn on South Africa that these instruments actually bite when it was sued in international forums.[19]As if that one not sufficient, South Africa with its ambitious transformation agenda was rudely awakened to the suffocation of policy space BITs could visit on an unsuspecting contracting party. Still in line with international practices, South Africa sought to review its BIT regime. What emerges from the recommendation has as a matter of record reflected the youth and naivety of South Africa as a country. While some of the recommendations are commendable, there seems to be no coherent policy direction on how to deal with a post first generation BIT phase. Paradoxically, all this confusion and ambivalence in dealing with the migration from first generation to second generation BITs shows a country which still has infantile institutions which need international instruments such as BITs to complement them. Over and above, with the FDI bill reflecting a total shift from regulating foreign investment using international instruments to the use of domestic legislation. It is doubtful whether South Africa can afford to leave the international investment regulation sphere.

* Research Fellow, Mandela Institute, University of the Witwatersrand School of Law, Johannesburg, South Africa. Research Associate, Economic Diplomacy Program, South African Institute of International Affairs. Bachelor of Laws (University of Fort Hare),Master of Laws in Labor Studies (University of KwaZulu Natal),Master of International Law and Economics (World Trade Institute),LLD Research Fellow (Institute of Social Science, University of Tokyo). Email address: The views expressed are exclusively the author’s and not necessarily those of the organization’s he is involved with.

[1] See Lauge N Skovgaard Poulsen ‘Bounded Rationality and the Diffusion of Modern Investment Treaties’. International Studies Quarterly (2013) 1-14 at page 7.

[2] The Constitution Act 108 of 1996.

[3] See Section 39 of the South African Constitution (avaiblable at )

[4] It provides thus: ‘No one may be deprived of property except in a law of general application…’

[5] The Hull Formula of compensation provides that in case of expropriation, a state must give the investor reparations which amount to the market value of the expropriated property. This is expressed as ‘prompt, adequate and effective’. It was named after Secretary Cordell Hull of the United States who devised it. The Calvo doctrine is a counter to the Hull Formula. It provides that in situations of expropriation, compensation must be fair, just and equitable. In other terms, it must be the kind of compensation which the government can afford. It is named after Argentinian jurist and diplomat Carlos Calvo.

[6] See for instance Leon E Trakman ‘Choosing Domestic Courts Over Investor State Dispute Arbitration: Australia’s Repudiation of the Status Quo’ UNSW Law Journal,Vol.35(3),2012,979.(available at ).

[8] See Rob Davies ‘New Approach Needed on Investment Treaties’ Speech Presented at the South Centre, Geneva(available at )

[9] Section 1(f)(i)

[10] Section 2(c).

[11] Section 5(2).

[12] Section 8(2)(a-d).

[13] Section 8(4)

[14] Section 10.

[15] See Salini Costrutori SpA & Halstrade SpA v Morocco (ICSID Case No.ARB/00/4/Decision on Jurisdiction 23 July 2001) at para 52.

[16] See Agri South Africa v Minister of Minerals and Energy 2013 [ZACC] 9.See also Azwimpheleli Langalanga ‘South African Courts and the Expropriation Conundrum: Caveat Foreign Investor?. African International Legal Awareness, May 2013 (available at )

[17] See SADC Protocol on Finance and Investment of 2006 (available at )

[18] See Southern African Development Community Model BIT Template, July 2012 (available at )

[19] Piero Foresti, Laura de Carli & Others v The Republic of South Africa ICSID Case No ARB (AF)/07/01.