After almost a year and a half since the first draft of the Promotion and Protection of Investment Bill (Investment Bill) was released for public comment in November 2013, a revised Investment Bill will shortly be introduced into Parliament for deliberation. The question which needs to be addressed is whether the Department of Trade and Industry (DTI) has taken heed of the comments submitted by interested groups in response to the Investment Bill. This consideration is important because the adoption of the Investment Bill has the potential to limit the flow of foreign direct investment to South Africa pursuant to the termination of its Bilateral Investment Treaties (BITs) with a number of trading partners.
A high-level review of the revised Investment Bill reveals that although certain clauses have been clarified, the major concerns raised about the first draft are still present. These concerns include:
- the expropriation provisions in the revised Investment Bill are not similar to traditional BITs;
- there is concern regarding whether the regulation of national treatment as an investment protection principle for foreign investors goes far enough in the revised Investment Bill; and
- the dispute resolutions provisions determine that local remedies in local courts must first be exhausted before the government may consent to international arbitration.
The South African government has expressed its firm intention to proceed with the replacement of BITs that are deemed not to be in the interest of South Africa, and to regulate any future foreign investment on the same basis as any national investment. This strong stand-point makes it important for foreign investors (from countries with which South Africa would have previously had BITs) to understand what protections will exist for their investment in South Africa.
A plain reading of the revised Investment Bill reveals that the South African government has no intention of providing foreign investors with a higher degree of protection than a national investor. The contention being that South Africa's domestic legislation provides sufficient legal protection to any foreign investor aggrieved by any direct or indirect effect that a decision or action by the government may have on their investment.
This contention may well be viewed as correct from a South African investor's perspective however the position is different from a foreign investor's perspective in that they need to decide which country to invest in. Foreign investors are also likely to do a cost-benefit analysis, weighing the risk of investing in South Africa versus the risks associated with another jurisdiction. Although the existence of BITs are only one of the factors a potential foreign investor takes into account when making investment choices, the lack of a BIT could (depending on the investor's appetite for risk) be the deciding factor.
The implications of the Investment Bill in general for foreign investors are that an investor who invested prior to the termination of any BIT will still retain the protection of the BIT for the duration of the sunset period (between 10 to 15 years). Any investor who invests between the date of termination of the BIT and the eventual promulgation of the revised Investment Bill will be limited to recourse similar to that which a South African citizen would have in terms of domestic legislation. On the eventual promulgation of the revised Investment Bill, an aggrieved foreign investor will be limited to mediation, domestic courts or statutory institutions to resolve disputes. Foreign investors' access to international arbitration will be dependent on the state's consent thereto.
The Investment Bill does guarantee certain international investment law principles ie national treatment, security of investment, provisions regulating and preventing arbitrary expropriation, and the ability to transfer funds as a foreign investor (subject to taxation and other legislation). However, foreign investors' biggest concern may well be the regulation of dispute resolution since, in reality, the Investment Bill provides no recourse to international arbitration. Given how government bureaucracy works, foreign investors are unlikely to receive the necessary governmental consent to take the dispute to international arbitration.
In order to ease foreign investors' concerns, the government should consider explicitly consenting to international arbitration with certain caveats such as:
- the seat of arbitration shall be in South Africa; and
- the law governing the international arbitration shall be South African law.
This compromise should alleviate some concerns for foreign investors who may be more comfortable knowing that an independent arbitrator (not the courts) will settle their dispute. This proposal would need to be aligned with the promulgation of an International Arbitration Act based on the United Nations Commission in International Trade Law Model (1985 version or 2006 version) on International Commercial Arbitration which limits the interference of domestic courts in the adjudication of the disputes. While this solution may not provide absolute peace of mind to potential foreign investors, what it does do is meet foreign investors half-way by providing recourse to international arbitration. This concession will align with the Department of Justice's initiative to introduce an International Arbitration Bill during the latter part of this year.