Comment on Foreign Direct Investment under South Africa’s Investment Protection Regime by Sophia Louw

Comment on Foreign Direct Investment under South Africa’s Investment Protection Regime by Sophia Louw

Comment on Foreign Direct Investment under South Africa’s Investment Protection Regime by Sophia Louw

Introduction

The contradictory ideals of achieving radical land redistribution whilst attracting foreign direct investment based on investor confidence have tested President Cyril Ramaphosa’s presidency since he entered office. Land reform has indeed been a pressing subject in the South African dialogue since the fall of apartheid in 1994. But in the post-apartheid presidencies preceding Ramaphosa, no meaningful land reform was implemented. In late February 2018, the ruling party, the African National Congress, began a process to consider the amendment of the constitutional guarantee of property rights (section 25 of the Constitution) to allow for expropriation of land without compensation[1] – a radical kind of land reform. The news has caused serious concerns among international investors.

At the same time, President Ramaphosa has thrown his weight behind an elaborate international road show aimed at raising USD 100 billion in foreign direct investment over the next five years.[2] This ambitious undertaking presupposes that South Africa offers an attractive environment to capital with nothing to deter the confidence of investors. However, uncertainties about expropriation without compensation risks undermining the appeal of South Africa and places a spanner in the works for the President’s vision to court international finance.[3]

This article provides an overview of the existing protection for foreign investors in South Africa and provides an introduction to the question as to whether investors can turn to international arbitration as a protection mechanism, with emphasis on expropriation of land without compensation.

The current state of South African Investment Protection

Until 2010, South Africa offered protection to international investors through a network of bilateral investment treaties (“BITs”). South Africa signed 49 BITs in total, which all made provision for Investor-State Dispute Settlement (“ISDS”) under ICSID, UNCITRAL or ad hoc arbitration proceedings.

In 2007, South Africa found itself in ICSID proceedings against a group of European investors who alleged that the Government, by enacting legislation designed to improve social conditions of historically marginalised and discriminated South Africans, extinguished their mineral rights without providing compensation. This investor-State dispute, Piero Foresti, Laura de Carli and others v the Republic of South Africa, came to a close in August 2010 when the parties settled.[4] However, it exposed how BITs and ISDS arrangements could pose a risk to South Africa’s own regulatory and legislative frameworks, which had been developed in light of public interest. As a result, the Government failed to renew BITs. To date ten BITs[5] have terminated.

The absence of BITs has created a gap in the investor protection system, compelling Parliament to pass legislation, namely the Protection of Investment Act (the “Act”),[6] to provide guarantees to investors. Regrettably, the Act is not yet in force and its commencement date will be promulgated by the President, at his pleasure.

The Protection of Investment Act, International Arbitration and Land Expropriation

A comparative analysis of the Act in its current form and South Africa’s previous BITs suggests that the Act does not provide the same, robust protection as South Africa’s BITs. In particular, and most importantly for purposes of this article, the Act significantly departs from the international standards of dispute resolution, expropriation and compensation. This is cause for serious concern.

Dispute Resolution under the Act

Under section 13 of the Act, the obligation to submit disputes to international arbitration is scrapped but a process of mediation is introduced. Subject to the exhaustion of internal remedies, foreign investors may sue in the local courts.[7] International arbitration proceedings may only commence at the South African Government’s discretion, and, to complicate matters, such proceedings will not be between the investor and the government but between the South African State and the home State of the investor.[8]

One of the underlying features of an investor-friendly State, as emphasised by the principal architect of the ICSID Convention, Aron Broches, is recourse to international arbitration.[9] International arbitration presents a forum where disputes are transferred from the political and diplomatic arenas to a judicial arena. The dispute settlement process is therefore depoliticised and effectively reduces the potential for inter-State conflict.

Seen in light of this, the Act politicises and enhances the likelihood for inter-State conflict.

Expropriation

The expropriation clause in the Act reflects section 25 of the Constitution, which presently requires just and equitable compensation to be paid in the event of expropriation. However, should section 25 be amended so as to allow expropriation without compensation, as announced by the ANC,[10] the expropriation clause in the Act will mirror that constitutional amendment. There will thus be no need for “prompt, adequate and effective” compensation and “immediate, full and effective” compensation, which are the compensation standards in most international investment agreements. This would be a striking withdrawal by South Africa from international standards of foreign investment protection.

Conclusion

Foreign investors in South Africa find themselves in a kind of legal purgatory. Since the Act has not yet come into force and since South Africa continues to terminate BITs as and when they come up for renewal, there is effectively no right of recourse to international arbitration for many foreign investors. Furthermore, the Southern Africa Development Community Treaty does not provides a mechanism for ISDS unlike, for example, the Organisation of Islamic Cooperation Treaty. As such, international investors should plan carefully and consider whether there are BITs[11] or sunset clauses that are still in force[12] and can be relied on.

It remains unclear when or how the South African Government will implement land expropriation without compensation. It also remains unclear when the Act will come into force. What is clear is that the lack of harmonised legislation and policy on these topics place foreign investors at great risk. It is critical therefore that South Africa adopts a clear position on investment protection for foreign direct investment, expropriation and the avenues for dispute resolution so as to encourage and retain international investment. In the interim, foreign investors should be careful to protect their investments and engage legal counsel with specific expertise in the field.

References

[1]   “National Assembly adopts motion on land expropriation without compensation”, 27 February 2018, News24, available online https://www.news24.com/SouthAfrica/News/breaking-national-assembly-adopts-motion-on-land-expropriation-without-compensation-20180227.

[2]    “Ramaphosa Vows to ‘Hunt’ $100 Billion in South Africa Investment”, 16 April 2018, Bloomberg, available online https://www.bloomberg.com/news/articles/2018-04-16/ramaphosa-vows-to-hunt-100-billion-in-south-africa-investment.

[3]    South Africa Reserve Bank statistics show that FDI into South Africa declined from c. R76 billion in 2008 to just R17.6 billion in 2017. A UN report, the ‘Global Investment Trends Monitor’ indicates that in 2015 FDI into South Africa fell by 74% to $1.5bn.

[4]    Piero Foresti, Laura de Carli and others v the Republic of South Africa, ICSID Case No. ARB(AF)/07/01, Award (4 August 2010).

[5]    To date, South Africa has cancelled its BITs with the following countries: Argentina, Austria, Benelux, Denmark, France, Germany, Netherlands, Spain, Switzerland and the United Kingdom.

[6]    Act 22 of 2015: Protection of Investment Act, 2015 (the “Act”), available at https://www.thedti.gov.za/business_regulation/acts/Investment_Act_22of2015.pdf

[7]    See Section 13(5) of the Act.

[8]    See section 13(5) of the Act.

[9]    “The Convention on the Settlement of Investment Disputes between States and Nationals of Other States”, 136, Aron Broches, Recueil des Cours 331, 343 (1972).

[10]    “National Assembly adopts motion on land expropriation without compensation”, 27 February 2018, News24, available online https://www.news24.com/SouthAfrica/News/breaking-national-assembly-adopts-motion-on-land-expropriation-without-compensation-20180227.

[11]   The following BITs are still in force: China-South Africa BIT (1997); Cuba-South Africa BIT (1995); Finland-South Africa BIT (1998); Greece-South Africa BIT (1998); Italy-South Africa BIT (1997); Republic of Korea-South Africa BIT (1995); Mauritius-South Africa BIT (1998); Nigeria-South Africa BIT (2000); Russia Federation-South Africa BIT (1998); Senegal-South Africa BIT (1998); South Africa-Sweden BIT (1998); and South Africa-Zimbabwe BIT (2009).

[12]   All of the BITs terminated by South Africa thus far have sunset clauses.

One thought on “Comment on Foreign Direct Investment under South Africa’s Investment Protection Regime by Sophia Louw”

  1. Whilst I agree that introduction of expropriation without compensation would be a concerning departure from international standards, same cannot necessarily be said for lack of investor-State arbitration. If one looks at a fellow BRIC member, Brasil, it had no problem attracting massive FDI without BITs, and now having some BITs which only contain mediation provisions similar to SA Act ones. But the situation is definitely interesting and should be carefully followed.

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