South Africa’s government is juggling a lot of balls as it tries to find solutions to speed up land reform, while at the same time searching for a considered approach to assure local and international investors that their investment rights are protected. A Joint Constitutional Review Committee has been mandated to review the merits of changing Section 25 of the Constitution to allow for ‘expropriation (of assets) without compensation’ and a task team has been established by President Ramaphosa to reassure South Africans that government’s position on land reform is not a form of ‘smash and grab’.
Robyn Berger, Principal at Bravura, an independent investment banking firm specialising in corporate finance and structured solutions, cautions that there are other regulatory changes in progress which, once harmonised with South Africa’s final stance on land expropriation, could have significant consequences for our ability to attract future foreign direct investment. She says, “An uncertain regulatory landscape will not instil confidence in foreign investors, something that our economy can ill afford.”
The previous framework regulating foreign investment protection in South Africa
Since 1994, South Africa has entered into a number of Bilateral Investment Treaties, which are international investment agreements that ensure countries are bound to treat investors from other countries fairly. BITs, as they are referred to, provide standardisation for all parties regarding investment protection and potential expropriation, as well as obliquely indicating a state as being investor friendly.
Berger says, “A key aspect to BITs is that they contain clauses which state that in the event of assets being expropriated from foreign investors, these investors must be adequately compensated. For expropriation to be lawful, according to BITs, it must occur against compensation, which should be ‘prompt, adequate, and effective’ or ‘immediate, full and effective’. This means that the compensation for expropriation to be paid to investors must reflect the market value of the expropriated investment.
“Another attractive feature in BITs is that should there be a dispute, the settlement mechanism takes the form of international arbitration, often under the auspices of the World Bank’s ICSID (International Centre for the Settlement of Investment Disputes), referred to as investor-state dispute settlement.”
As with any international mechanism, says Berger, BITs are not perfect. “Some developed and developing nations believe that investor-state dispute settlement is too investor focused, especially those governments that have lost several large cases. The upshot is that although BITs remain the gold standard, some countries are reviewing their investment protection policies to ensure that they are more balanced. However, there remains consensus that investor protection policies should provide for adequate international dispute settlement.”
South Africa was involved in an international arbitration dispute that concluded in 2010, when Italian claimants launched a challenge with respect to their mining rights in South Africa, and the country’s BEE policies were challenged in terms of the BIT. Although no award was made, the arbitration highlighted that BITs and international arbitration posed risks to South Africa’s own regulatory frameworks that have been developed in the public interest.
Following a review of BITs shortly thereafter, the South African government indicated that it would be changing its foreign investment protection policy, and since 2015 has begun cancelling BITs as these came up for renewal.
So far, BITs have not been renewed with European Union member countries that include Belgium, Denmark, Germany, Luxembourg, Spain, Switzerland and the Netherlands. Berger says that it should be noted that much of South Africa’s foreign direct investment (‘FDI”) comes from these countries whose BITs have been terminated.
Criticism in respect of the Protection of Investment Act of 2015
The Minister of the Department of Trade and Industry, Rob Davies, announced in 2014 that BITs will be replaced with the Protection of Investment Act.
Berger points out that the Protection of Investment Act of 2015 has been criticised nationally and internationally for its approach with respect to a number of aspects. The definition of ‘investment’ follows an enterprise based approach (requires the establishment, acquisition or expansion of an enterprise or the holding or acquisition of shares in an enterprise for an investment to exist) and is limited by the legality of the investment. The enterprise must be lawful and in accordance with the laws of South Africa, thereby affirming that both local and foreign investors have to comply with the laws of South Africa. Therefore, an investment will only be covered if consistent with South Africa’s development policy expressed through domestic legislation.
A further concern is that the investment must be made by committing resources of economic value over a reasonable period of time, in anticipation of profit. This therefore arguably excludes portfolio investments. The upshot is that fewer investments are covered by the Act and therefore fewer foreign investors will be able to rely on its protections.
Berger also points out that the expropriation clause in the Protection of Investment Act intentionally mirrors Section 25 of the Constitution. It states that foreign investors have the right to property as provided for in the South African Constitution and may only be expropriated for a public purpose or in the public interest and subject to compensation (the amount of which and the time and manner of payment of which have either been agreed to by those affected or decided or approved by a court). “This is where the concern lies” says Berger, “because BITs provide a safety net in that compensation must be ‘prompt, adequate, and effective’ or ‘immediate, full and effective’ and the Promotion and Protection of Investment Act omits this.”
The other area of concern is dispute resolution. The Act states that if an investor has a dispute regarding an action taken by the South African government, they may within six months request the Department of Trade and Industry to facilitate the resolution by appointing a mediator. A foreign investor may also approach any competent court, independent tribunal or statutory body within South Africa for the resolution of the dispute.
Berger says, “Access to international arbitration provides security to investors. Foreign investors could feel prejudiced in that the arbitration process will now occur in South Africa, and the process is at the mercy of the Minister of the Department of Trade and Industry. The Act does go on to state that if all domestic remedies have been exhausted the South African government may consent to international arbitration, but it is not clear how long and at what point this would be deemed to have occurred.”
Currently effectively no additional protection for international investments
Although the Protection of Investment Act was signed into law by former President Jacob Zuma in 2015, it has yet to be promulgated. This means that with the termination of BITs and the Protection of Investment Act not yet in place, there is currently effectively no protection for foreign investors save for normal South African law. Berger says, “BITs that were terminated do have a form of protection known as a ‘grandfather’ clause where all investments made prior to the date of termination still have the protections of the BIT for a further period of up to twenty years. While this provides relief for existing foreign investors, it could deter new foreign investment.”
Securing the future of foreign investment
Berger notes that SARB 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. However, the Department of Trade and Industry claims that there is very little to no correlation between investment inflows and BITs.
Foreign investment activity cannot be ‘put on hold’ until these issues are finalised. Just recently The Land and Agricultural Development Bank (the Land Bank) – which accounts for 30% of credit for farmers – announced the signing of a R900 million term loan facility secured through the German Development Bank (the KfW), with favourable terms that will increase the bank’s long-term liquidity for the benefit of South Africa’s agricultural sector.
Berger says, “We cannot speculate on how expropriation without compensation would affect this or similar-type loans in terms of disbursements and repayment agreements. Loan and bond agreements entered into with a bank do not typically take into account a scenario in which property seizure results in a forcible change of ownership.
It is critical now that the South African government swiftly adopts a stance on investment protection for foreigners and makes explicit the definitions of when and how this could occur without compensation. The various Acts and laws that affect expropriation and compensation must be finalised, harmonised and promulgated in order for foreign investors to factor in this risk.”
Categories: B-BBEE, Economy, News
Published: 10 May 2018