State must aid mining investment
Policies are hurting SA’S image and ranking as a safe destination for capital
THE South African mining industry has, over the past few months, received significantly bad publicity over issues like the nationalisation of mineral resources, socioeconomic concerns and the dangerous labour unrest.
It all seems to have added to the fact that SA’s ranking as an attractive mining investment destination has dropped further, according to the latest report released by the Canadian-based Fraser Institute.
The survey by the Fraser Institute reveals that uncertainty about the South African government’s mining policies is hurting the country’s image and ranking as an investment destination, despite the government’s assurance that nationalisation is not on the cards. This year SA’s ranking as a mining destination dropped from 53rd place last year to 64th this year from 93 mining jurisdictions.
As a country with a significant percentage of the world’s exploitable mineral resources, and at one stage considered as a very attractive mining destination, something will need to change drastically in order to ensure that SA does not end up as one of the least favourite mining destinations.
The release of the Draft Mineral and Petroleum Resources Development Bill 2012, which intends to amend the Mineral and Petroleum Resources Development Act No 28 of 2002 (the act) seems to have added more fuel to the situation, as the bill will, in a number of respects, increase administrative hurdles for mining companies instead of “improving the regulatory system and streamlining administrative process”, as the bill purports to do. A number of interested and affected industry groups have submitted comments on the bill and we trust that the Department of Mineral Resources will take all the comments to heart in order to ensure that the bill achieves what is stated in its preamble.
The main concern for any foreign investor is security of tenure for his or her investment. Investors generally feel threatened when governments start promoting policy changes that potentially could have an adverse effect on the rights they enjoy.
SA, like most other countries, has concluded a number of bilateral investment treaties with the countries with which it has trade and investment rela- tionships. In most instances these treaties contain a provision that prohibits the expropriation of investments made by foreign nationals in SA, save if such expropriation is “for a public purpose or in the national interest” accompanied by “immediate, full and effective compensation”. Any expropriation of an investment of a foreign national by SA would be open to a potential breach of its bilateral investment treaties should such expropriation fail to comply with terms and conditions for expropriation as contained in the relevant treaty.
The enactment of the act on May 1 2004 is a prime example of how certain foreign investors (Italian nationals) in the mining industry in SA perceived the act as a form of expropriation of their common law entitlement to exploit and mine minerals. A number of foreign nationals (claimants) initiated arbitration proceedings against SA in the International Centre for the Settlement of Investment Disputes during 2006, alleging that SA was in breach of article 5 of its treaties with Italy and Luxembourg which prohibited expropriation on two grounds:
The enactment of the act on May 1 2004 extinguished certain old-order mining rights allegedly held by the claimants; and
The enactment of the act read with the Mining Charter, which required the compulsory equity divestiture requirement with respect to the claimants’ shares in the operating companies in SA.
The centre did not decide the aforesaid points on merit as the matter ended due to a jurisdictional point raised by SA — that SA is not a member to the Convention on the Settlement of Investment Disputes between States and Nationals of Other States. However, it seems that the question raised during the Centre for the Settlement of Investment Disputes arbitration as to
The act in effect did put an end to the previously unfettered entitlement to sell, lease or cede the mineral right at any time
whether the enactment of the act constituted the expropriation of oldorder mining rights or unused oldorder rights has been finally settled by the Constitutional Court in the matter of Afgri v Minister for Mineral Resources and others (CC) 2013 (the Afgri SA case).
The majority judgment in the Afgri case found that what the Mineral and Petroleum Resources Development in effect did was to put an end to the:
Ability to sterilise or not exploit minerals;
Previously unfettered entitlement to sell, lease or cede the mineral right at any time; and
Mineral right or unused old-order right for which prospecting or mining right could not be acquired in terms of transitional provisions of the act.
This was done within the confines of a law of general application, the act, which in terms of schedule 2 thereof created a process in terms of which holders of old-order rights or unused old-order rights, as the case may be, could apply for the conversion of such right into rights as contemplated by the act, on compliance with certain legislative requirements, in order to preserve the rights and ensure security of tenure.
The Constitutional Court held that the act effectively did not result in the expropriation of the rights held by the applicant in the Afgri case, as the act merely resulted in a deprivation of components of the mineral rights enjoyed by the applicant, essentially on the following basis:
The act is a law of general application as contemplated by section 25(1) of the constitution of SA, which had the effect of ensuring equitable access to all of the natural resources of SA;
The act made provision for the holders of old-order rights (to apply within five years from the effective date of the act for conversion of rights) and holders of unused old-order rights like the applicant to apply within one year from
The department is currently drafting a new bill, the Foreign Investment Bill, which will replace all the existing bilateral investment treaties
the effective date of the act for the conversion of rights;
The deprivation of the rights of the applicant did not result in the compulsory acquisition of rights in property by the state, as the state did not acquire any property but the state is now merely the custodian of the mineral resources of SA and not a co-contender for mineral rights with people and business entities;
No compensation is payable by the state should there not be an element of actual acquisition of property rights by the state.
It should be noted that item 12 of schedule 2 to the act does make provision for the payment of compensation by the state for expropriation on compliance with the requirements contained therein. The Constitution Court also clearly stated in the Afgri case it would be inappropriate to decide definitely that expropriation in terms of the act was incapable of ever being established. Like the Supreme Court of Appeal, I accept that a case could be pleaded and argued properly to demonstrate that expropriation did take place.
That is the avenue that must be left open, particularly when regard is had to the express provisions made for expropriation in item 12 of schedule 2 to the act.
The reasoning of the Constitutional Court, as aforesaid, as to why the act did not result in the expropriation of rights seems sound and is in line with SA’s bilateral investment treaties obligations. Our courts have recognised that any person, including a foreign national, under a different set of facts could potentially still be able to demonstrate that expropriation took place in terms of the act .
A majority of the bilateral investment treaties SA has concluded are coming to an end and the Department of Trade and Industry has reported that it would refrain from entering into any future bilateral investment treaties as the department is currently drafting a new bill, the Foreign Investment Bill, which will replace all the existing bilateral investment treaties. One of the purposes of introducing a foreign investment act would be to, among other aspects, regulate how the South African government would compensate foreign investors in the event of expropriation in order to attract investment opportunities and introduce uniform conditions with all trading partners. It will also need to be seen whether the current expropriation bill before parliament, which also contains a very wide definition of property capable of expropriation by the state, will not potentially constitute a breach of certain bilateral investment treaty obligations of SA.
It would seem that SA has sufficient protection for foreign investors, as recourse is available to foreign nationals in the event of expropriation without compensation, should a proper case for expropriation be pleaded and argued to demonstrate that expropriation took place.
It is now up to the South African government to ensure that the policies and proposed legislative changes for the mining industry do not result in a further deterrence of investment due to overly burdensome and illogical administrative red tape, and that SA’s attractiveness as a mining investment destination be regained.
NEED TO STAY ATTRACTIVE This year SA’s ranking as a mining destination dropped from 53rd place last year to 64th this year from 93 mining jurisdictions