South Africas changing approach to investment protection

Introduction

Many are concerned about South Africa’s change in approach to investment protection, in particular the protection afforded to investors against expropriation. There is still uncertainty about what the final legal framework will look like, but investors can derive some comfort from reports that their concerns are being addressed.

Since the mid-1990s, foreign investments in South Africa have in many instances been protected from expropriation through bilateral investment treaties (BITs). They have also been protected by South African common law, local legislation and the South African Constitution.

South Africa’s approach to investment protection is changing. This follows a review South Africa conducted of its BIT obligations. The review led to a decision by the South African cabinet in July 2010 to

• develop a new investment act to codify typical BIT provisions into domestic law, and strengthen investor protection
• terminate first-generation BITs and offer partners the possibility of renegotiating
• refrain from entering into BITs in the future, unless there are compelling economic and political reasons for doing so.

At the beginning of October 2012, South Africa cancelled its BITs with Belgium–Luxembourg, Spain, Germany, Switzerland, the Netherlands and Denmark. It is reported that South Africa will soon be cancelling its remaining European BITs. Discussions are apparently ongoing regarding the future of the China–South Africa BIT.

South Africa is one of a number of developing countries moving away from the traditional form of investment protection offered by BITs. Indonesia intends to terminate more than 60 BITS, and Venezuela, Ecuador and Bolivia have already withdrawn from the ICSID Convention. Australia has apparently raised concerns about international dispute resolution mechanisms.

South Africa published a draft Promotion and Protection of Investment Bill for public comment in October 2013 (the Bill). The Bill sets out to promote and protect investment in a manner that reflects public interest and that strikes a balance between the rights and obligations of all investors. Various stakeholders, including many of South Africa’s trading partners, raised concerns that the protection afforded to foreign investors under the Bill will be less than that currently afforded under BITs.

After the receipt of public comment, the Bill was referred to the National Economic Development and Labour Council (NEDLAC) for discussion. It has been reported that NEDLAC has responded favourably to foreign investors’ concerns regarding the expropriation and dispute settlement provisions of the Bill.

The revised draft Bill has not yet been released.

Concerns relating to the draft Bill

South Africa’s trading partners expressed the following concerns about the Bill in its draft form:

• The Bill contains exclusions of what actions might constitute expropriation: specifically any measure which results in a deprivation of property where the State does not acquire ownership of such property (provided that there is no permanent damage to the economic value of the investment) or where the investor’s ability to manage, use or control his or her investment in a meaningful way is not unduly impeded.
• The Bill states that the amount of compensation payable for an expropriated investment must be ‘just and equitable’, rather than the fair market value of the expropriated asset. The compensation must strike a balance between public interest and the interests of those affected, and take into account all relevant circumstances, including the current use of the investment; the history of the acquisition and use of the investment; the market value of the investment; and the purpose of the expropriation.
• The Bill does not contemplate the possibility of compulsory recourse to international arbitration as a means of resolving disputes. An investor may request that a dispute be resolved through mediation and the Minister of Trade and Industry for South Africa must make regulations on the processes and procedures for the settlement of disputes. This implies that the dispute resolution procedure may be prescribed and that investors aggrieved by the action of the State may have to rely on South African courts to help them, rather than international arbitration.
• The Bill does not contain the specific ‘fair and equitable treatment’ provisions that are common in many BITs. However, the Bill does state that one of its purposes is to ‘ensure the equal treatment between foreign investors and citizens’ of South Africa. Once enacted, the Bill will be applicable to investments made by locals and foreigners, which necessitates equal treatment of the two types of investor. The Bill also provides that South Africa ‘must give effect to national treatment and treat foreign investors, their foreign investments and their returns not less favourably than it treats South African investors in their business operations that are in like circumstances’.

Should investors be concerned at this stage?

The latest version of the Bill is still to be published. If reports are correct, South Africa’s trading partners can be optimistic that some of their concerns about the draft Bill have been addressed. It has been reported that the provisions contained in the current Bill which relate to expropriation have been removed and will be dealt with in the new Expropriation Act and that the exclusion of ‘deprivation’ from the definition of “expropriation” (referred to above) has been removed.

South Africa’s change in approach to the protection of foreign investments will be regulated not only by the Bill (once it becomes a formal Act) but also by the new Expropriation Act (which will amend the 1975 Expropriation Act). The new Expropriation Act has yet to be promulgated, but it has been published in the form of a bill for public comment. The Expropriation Bill states that the Minister of Public Works may expropriate property “for a purpose connected with the execution of his or her mandate or upon request of an organ of state” but that this is “subject to the obligation to pay compensation which is just and equitable”.

The Expropriation Bill states that the compensation payable to an expropriated owner must also reflect an equitable balance between the public interest and the interests of the expropriated owner, having regard to all relevant circumstances, including the following (most of which are required by the Constitution)

• the current use of the property
• the history of the acquisition of the property
• the market value of the property
• the extent of direct state investment and subsidy in the acquisition and beneficial capital improvement of the property
• the purpose of the expropriation.

The Expropriation Bill is the subject of public comment and further parliamentary debate. There is much uncertainty about what the revised Bill and Expropriation Act will contain and investors should continue to monitor the situation.

The President of South Africa announced in the 2015 State of the Nation Address that measures will be taken to limit foreign ownership of agricultural land and that there will be a move to a system of long-term leasehold. This is not currently addressed in either of the bills discussed above.

However, investors should derive some comfort that both pieces of legislation will be subject to the supremacy of the South African Constitution, which prohibits any form of expropriation except as against payment of just and equitable compensation, based on the factors mentioned.