The Cabinet decision of 20 July 2010 specified that an inter-ministerial work group should commence work on an investment protection act for South Africa. Such an act would incorporate, codify and interpret core international law concepts and clarify the level of protection that investors may expect in South Africa. On 1 November 2013 the draft Bill on the Promotion and Protection of Investment [NOTICE 1087 OF 2013 in Government Gazette (GG) No. 36995] (hereinafter “the Bill”) was published for public comment. The notice provided for a three month public comment period. This period came to an end on 31 January 2014. The Department of Trade and Industry is currently assessing the public comments and will introduce the Bill to Parliament as soon as the required technical and constitutional processes have been completed.
Objectives of the Bill
The draft Promotion and Protection of Investment Bill clarifies the international investment law concepts of national treatment, expropriation, compensation and transfer of funds in line with South African constitutional principles. The Bill also seeks to achieve several balances, including the rights and obligations of investors, to provide adequate protection to foreign investors, to ensure that South Africa’s constitutional obligations are upheld, and that government retains the policy space to regulate in the public interest. There is no mention of the international investment law principle of “fair and equitable treatment” since it was felt that this concept is too widely framed and subject to various controversies. South African law already provide sufficient guarantees for substantive and procedural due process.
National treatment prohibits discrimination by a state vis-à-vis foreign investors or investments as compared with how that state treats its own investors or investments. Absent a treaty obligation, there is no obligation on States to accord foreign investors’ national treatment in public international law. The draft Bill includes a national treatment standard, which is likely to be considered beneficial by foreign investors. However, this standard is subject to important exceptions in respect of measures to redress historical, social and economic inequalities as stated in the South African Constitution and to uphold rights guaranteed in the Constitution. This is designed to ensure that the South African Government has regulatory scope to redress discrimination in South Africa through measures such as those reflected in Broad-Based Black Economic Empowerment (BEE), environmental measures and public health measures. Such measures are not deemed to contravene the national treatment standard in the draft Bill.
Physical Security of Investment
The draft Bill provides for the physical security of investors, their investments and returns. It provides for equal treatment of all investors subject to available state resources. Therefore, it clarifies that South Africa bears no greater obligation to foreign investors than to its own investors in respect of their investments or returns. It also clarifies that all investors will be treated equally with regards to compensation for losses incurred owing to war, other armed conflict, riots or similar circumstances. The standard of protection specified does not extend beyond physical security of an investment and does not guarantee regulatory and legal security of such investments.
Expropriation and Compensation
It is trite that the general rule applied under customary international law is that expropriation can only occur for “public purposes, under due process of law, on a non-discriminatory basis. This formulation is fully aligned to Article 25 of Constitution of the Republic of South Africa. The South African Constitution more than meets this standard. The draft Bill provides that all investors will have a right to compensation in the event of expropriation. BITs typically call for “prompt, adequate and effective” compensation while the draft Bill provides for just and equitable compensation that is effected in a timely manner. Considering this formulation, compensation is considered prompt if paid without delay; adequate, if it has a reasonable relationship with the market value of the investment and effective, if paid in convertible or freely convertible currency.
Unlike the so-called “Hull formula” that uses fair market value as an end point, the constitutional formulation recognises market value as one of the factors that may be taken into account to arrive at “fair and equitable” compensation that may be payable to an investor. There is considerable variance in respect of what constitutes “market value”. Reference may be found in BITs to “fair market value”, “genuine value”, “just compensation”, “real value”. For instance, the RSA-Netherlands BIT (1995) calls for “just compensation representing “genuine value” this arguably constitutes a standard of compensation that takes into account legitimate objectives of public interest. Article 25 of the Constitution thus situates market value amongst other criteria in order to achieve an overall balance; it does not disregard fair market since it remains a relevant and important benchmark for quantification of damages in context of expropriation. However, South African jurisprudence on this point indicates that courts will not easily depart from market value as a determinative criterion.
The issue of “indirect” and “creeping” expropriation by state action is also addressed in the draft Bill. The draft Bill clarifies that mere incidental adverse impact on the economic value of the investment does not constitute expropriation.
Transfer of funds
The provisions in the draft Bill on the issue free transfer of funds reflect the fact that while South Africa has a liberal transfer regime and foreign investors in particular have the right to repatriate returns on their investments. This provision also caters for situations where South Africa can invoke legitimate measures to restrict transfer of funds in situations where such transfers may result in serious difficulties for balance of payment purposes, the operation of monetary policy or exchange rate policy.
Right to regulate in the public interest
The draft Bill reiterates the right of the state to regulate in the public interest. Such measures may be necessary to redress historical, social and economic inequalities, and to uphold rights guaranteed in the South African Constitution. The right to regulate also include measures for the preservation cultural heritage and practices, indigenous knowledge and biological resources related thereto and national heritage. South Africa is a biologically diverse country and has put in place measures to curb bio-piracy through legislation that seek to ensure a balance between fair and equitable sharing with indigenous communities of benefits arising from bio-prospecting and indigenous knowledge. Furthermore, measures to foster economic development, industrialisation and beneficiation are also included within the ambit of this right since all investment should contribute to the achievement of South Africa’s economic objectives.
Investors have access to domestic courts and any competent tribunal that may have jurisdiction to hear matters related to an investment. It is further provided that the Department of Trade and Industry may facilitate the resolution of investment disputes upon the request of an investor. The Minister of the Department of Trade and Industry may also publish regulations to specify how the above mentioned facilitation may work. It is anticipated that a progressive approach to dispute avoidance may include the setting up of an investment ombudsman, a centralised contact point for all investment related disputes and later on a specialised body to deal with investment disputes. It has been argued that domestic courts have a limited capacity in South Africa to address matters involving foreign investors. This reflection has no doubt been made in light of the draft Bill excluding any recourse to international arbitration.
Allegations that investment, let alone foreign investment, is not adequately protected under South African law are not well founded. Through the new Bill the South African government will be able to boost the quality of its practices as South Africa is a specialised commercial jurisdiction which has efficient and well capacitated epistemic communities, including legal professionals and an independent judiciary, capable of dealing with complex legal issues. Examples of these courts include the specialised Commercial Crimes courts, Tax courts and Water courts etc. Certain issues can be outsourced for outside adjudication by independent quasi-judicial authorities such as the Competition Tribunal. There is a robust and complex maturity in the ability of South Africa to respond to adverse market conditions, interests of stakeholders and the overall responsibility of government to regulate in the public interest as may befit the ideals of a non-racial democratic dispensation so dearly acquired.
South Africa is implementing its new investment policy framework after extensive consultation. Various concerns have been raised about the protection of foreign investment in South Africa in light of the cancellation of BITs with various European countries. The cancellations are entirely legitimate and within the framework provided for by international law. Survival clauses will ensure that existing investments are protected for up to 15 years after termination of the BITs. All new investments are covered by South African law, the draft Bill introduces specific provisions that seek to reassure especially foreign investors regarding the application of international law concepts such as national treatment, security of investment, expropriation and the repatriation of funds. These standards have been enumerated to clarify the meaning and interpretation of such terms in relation to the South African Constitution. Furthermore, the draft Bill emphasises the right of government to regulate in the public interest in non-discriminatory manner. Any investor will have access to competent courts or tribunals that may have jurisdiction to hear matters related to investment under South Africa law, while the Department of Trade and Industry may also be approached to facilitate such matters.
*Director: Legal International Trade and Investment, the Department of Trade and Industry and extraordinary professor at the University of Pretoria