Protection of Investment Act may deter foreign investment

Source: Bizcommunity, 16/07/2018

Which was activated by a notice published in the Government Gazette,
on Friday 13 July, has been criticised nationally and internationally
for its approach with respect to a number of aspects. The European
Union`s Regional Chamber of Commerce and Industry stated that
foreigners are hesitant to invest in SA for fear that there will be a
lack of protection over their investment.

Expropriation without compensation

The section of the Act that most concerns foreign investors is whether
their assets can be expropriated without compensation? Previously,
South Africa was party to a number of bilateral investment treaties
(BITs) that ensure countries are bound to treat investors from other
countries fairly. 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.

BITs are now replaced by the new Protection of Investment Act. The
expropriation clause in the Act intentionally mirrors Section 25 of
the Constitution. It states that foreign investors have the right to
property, 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, because BITs provided a safety net in that compensation
must be ‘prompt, adequate, and effective’ or ‘immediate, full and
effective’ and the Protection of Investment Act omits this.
Foreign entities will no longer have the protection of international
dispute resolution

The other area of concern is dispute resolution. The Protection of
Investment 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.

Access to international arbitration provides security to investors. In
case of 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. 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 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.”
Negative impact on foreign direct investment

Minister of the Department of Trade and Industry, Rob Davies,
announced in 2014 that BITs will be replaced with the Protection of
Investment Act. Since 2015, the South African government began
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.

Much of South Africa’s FDI comes from these countries where BITs have
been terminated. The European Union’s Regional Chamber of Commerce and
Industry stated at the time that the withdrawal of the BITs does not
reflect well on SA. It sets the scene of a developing country
struggling for power and wanting to dominate foreign investors, rather
than an attitude of wanting to work together for the benefit of both
parties.

South African Reserve Bank (Sarb) statistics show that FDI into South
Africa declined from around R76bn in 2008 to just R17.6bn 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.

All of the above would seem to be odds with President Cyril
Ramaphosa’s $100bn investment initiative that was announced a couple
of months ago. It would not seem that the cancellation of BIT’s will
assist in making investors confident of investing into South Africa.
In particular, it is noted that the gazetting of the legislation was
at or about the same time that the UAE announced its commitment to
investing $10bn into South Africa which was as a result of initiatives
by the president and his counsel.

An uncertain regulatory landscape will not instill confidence in
foreign investors, something that our economy can ill afford. 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.