The South African government has indicated that it intends to move away from bilateral investment treaties (BITs), and to protect foreign investors by means of national legislation instead. In line with this, the government has terminated a number of BITs (including those with Germany, Belgium, Netherlands, Switzerland, Spain and Luxembourg), and published the Promotion and Protection of Investment Bill (the Bill) for public comment on 29 October 2013.
In this energy update we compare investor protection under BITs to the investor protection in terms of the Bill.
It must be noted that the Bill is still in draft form, and may undergo substantial changes after the consideration of public comments.
Overview of the Bill
The Bill provides a uniform investment protection regime in terms of which locals and foreigners will be treated equally.
The Bill will give more protection to investors from countries that do not have BITs with South Africa, but may result in investors from countries that had BITs with South Africa (which have subsequently been terminated in favour of the Bill) to reconsider their investment risk profiles.
Investors may be required to reconsider their investment decisions, taking into account a number of factors such as potential profit, cost of doing business, taxation, governance, labour relations, available infrastructure and investor protection.
Comparison between Bill and BITs
The Bill intends to provide equal protection to all investors, irrespective of their nationality.
The term investor is defined as: "any person who holds an investment in the Republic, and in the case of a natural person, means a person who holds an investment in the Republic regardless of nationality".
It therefore appears that the Bill applies to and protects local and foreign investors, and accordingly promotes the Constitutional right to equality.
BITs can only be amended if both State Parties agree to the amendment. If the Bill is passed, it may be amended by South Africa unilaterally through an act of Parliament.
Generally, BITs provide for dispute settlement mechanisms between (i) the two State Parties (usually in respect of the application and interpretation of the BIT), and (ii) the Host State and a foreign investor.
Disputes between State Parties
BITs would generally provide for these disputes to be resolved through consultations and other diplomatic channels. If the diplomatic channels fail, parties may refer the dispute to arbitration for a binding decision.
The Bill, as a piece of national legislation, does not provide for disputes between South Africa and any other State.
BITs usually grant an investor the right to bring an action against the Host State in an international tribunal. Another common feature of BITs is a provision allowing the investor to refer disputes to international arbitration without requiring the investor to first exhaust local remedies available in the host State.
The Bill, in its current form, does not expressly provide for international arbitration. The dispute resolution mechanisms available in terms of the Bill are (i) mediation by any "competent authority", and (ii) approaching "any court, competent, independent tribunal or statutory body".
It therefore appears to be possible for an investor to refer a dispute to an international tribunal, if that tribunal is competent to hear the matter.
The Definition of Investment
The Bill defines "investment" as including:
"the following assets held by an investor in the Republic:
- An entity;
- securities as defined in the Financial Markets Act 19 of 2013, and a share as defined in the Companies Act 71 of 2008;
- contractual rights, such as under turnkey, construction or management contracts, production or revenue-sharing contracts, concessions or other similar contracts;
- movable and immovable property, including commercial property, leases, mortgages, liens or pledges;
- intellectual property rights such as copyrights, patents, utility model patents, registered designs, trade-marks, trade-names, trade and business secrets and technical processes;
- rights conferred by law to carry out economic and commercial activities, such as licences, authorisations and permits;
Provided that in the above –
- the investment relates to a material economic investment or significant underlying physical presence in the Republic, such as operational facilities; and
- commercial contracts for the sale of goods or services and the extension of credit in connection with such commercial contracts, including claims thereunder, do not qualify as investments under this Act."
It is not clear what the threshold would be for an investment to be "material" or of "significance". This will hopefully be clarified in future drafts of the Bill.
Section 4(1) of the Bill further specifies that the Bill applies to investments "for commercial purposes". It is likely that residential property for personal use would be excluded from the Bill.
BITs usually either have (i) an enterprise-based definition of "investment", (ii) closed-list asset-based approach, or (iii) an open-list asset-based approach. The enterprise-based definition is generally regarded as being most favourable to the host State, and the open-list asset-based approach is generally regarded as most favourable to foreign investors.
The Bill, in its current form, follows a closed-list asset-based approach in its definition of "investment". This approach is considered to be the middle ground between the enterprise-based definition and open-list asset-based approach.
The provision regarding expropriation in the Bill is in line with the language of the Constitution.
Section 8 of the Bill provides that:
"An investment may not be expropriated except in accordance with the Constitution and in terms of a law of general application for public purposes or in the public interest, under due process of law, against just and equitable compensation effected in a timely manner."
The Bill excludes the following actions from being regarded as expropriation:
- measures taken by government that have an incidental or indirect adverse impact on the economic value of an investment;
- measures aimed at promoting or enhancing legitimate public welfare objections;
- issuance of compulsory licences in relation to intellectual property rights to the extent that such issuance is consistent with the applicable international agreements on intellectual property; and
- any measure which results in the deprivation of property but where the State does not acquire ownership of such property, provided that (i) there is no permanent destruction of the economic value of the investment, or (ii) the investors’ ability to manage, use or control his or her investment in a meaningful way is not unduly impeded.
BITs usually protect foreign investors against direct and indirect expropriation, with clauses such as the following:
"neither State Party shall take any measures of expropriation or nationalisation or any other measure having the effect of dispossession, direct or indirect, of nationals or companies of the other Contracting Party of their investments on its territory and in its maritime area, except in the public interest and provided that these measures are neither discriminatory nor contrary to a specific commitment."
The Bill narrows what may be regarded as expropriation.
We note that South Africa is a party to the SADC Protocol on Finance and Investment which requires signatory states to give investors "fair and adequate treatment" and pay "prompt, adequate and effective" compensation to foreign investors in the event of expropriation. The Protocol provides that foreign investors may refer a dispute to international arbitration. The Protocol defines 'investor' as a (legal or natural) person who has been admitted to make or has made an investment, and covers investors of both a State Party (a country who is a member of the Protocol), and other foreign investors. South Africa will continue to be bound by this Protocol if the Bill is passed.
Repatriation of Investment and Returns
Section 10 of the Bill provides that "a foreign investor may, in respect of any investment, transfer funds, subject to taxation and other applicable legislation."
At present, the only "other applicable legislation" to which the cross-border transfer of funds is subject to, is the exchange control regulations. By means of example, the exchange control regulations require exchange control approval for dividends of local shares to be repatriated to non-resident shareholders. In practice, the shares in question would normally be endorsed as "non-resident" by an authorised dealer after which dividends and proceeds in respect of the sale of shares can be freely repatriated to the non-resident shareholders, subject to compliance with various other requirements.
BITs would usually include a more specific provision in this regard, which lists the instances in which an investor may transfer funds. BITs do not normally require the transfer to be subject to any of the host State’s legislation. A typical BIT provision regarding repatriation would be as follows:
"A State Party shall accord to Investors the right to:
- Repatriate the capital invested and the investment returns;
- Repatriate funds for repayment of loans;
- Repatriate proceeds from compensation upon expropriation;
- Transfer payments for maintaining or developing the investment project;
- Remit the unspent earnings of expatriate staff of the investment project;
- Any compensation to the investor paid pursuant to this Agreement; and
- Make payments arising out of the settlement of a dispute by any means including adjudication, arbitration or the agreement of the State Party to the dispute."