Rights of foreign land owners a boon for investment drive

Inclusion of this guarantee in the expropriation without compensation clause will help assuage any jitters

If, as seems likely, the ANC retains its majority in this year’s general election, President Cyril Ramaphosa will secure a popular mandate to make the governance and regulatory changes needed to press ahead with his ambitious drive, announced in April 2018, “to generate at least $100bn in new investment over the next five years”.

This project may be hampered, however, by his government’s own efforts to honour its electoral promise to amend the property clause of the constitution to enable expropriation without compensation, with the aim of expediting land redistribution. The clause currently requires expropriation to be accompanied by compensation that is “just and equitable” (in amount, timing and manner of payment), and that is either agreed to by the owner or determined by a court.

Former finance minister Trevor Manuel, one of Ramaphosa’s four “investment envoys”, indicated in what may be an understatement in July 2018 that allaying foreign investors’ fears about the proposed amendment had been “a bigger challenge” than expected.

Though the governing party’s focus has been firmly on land, the perceived threat to property rights has generated concern across various industries, not least the mining sector, which has been plagued by perennial regulatory uncertainty and declining investment for at least a decade.

There are, however, three reasons why it is incorrect to see expropriation without compensation as another nail in the mining sector’s coffin.

First, the ANC has indicated no intention to derogate from the principle that compensation for expropriation must be “just and equitable”. Ramaphosa has stated that the ANC only supports an amendment that “outlines more clearly the conditions under which expropriation of land without compensation can be effected”, arguing that the constitution in principle already allows this, as long as it is “just and equitable”. There is in fact already judicial authority for this.

Second, if the amendment is merely aimed at clarifying what those circumstances should be, it is likely to be limited to the marginal categories of land identified in the draft Expropriation Bill gazetted in December, such as land that is stateowned, abandoned, held for speculation, or still occupied by apartheid-era labour tenants.

The bill, moreover, restrains the state from expropriating until after it has exhausted efforts to purchase the property on reasonable terms (a singular measure of protection that more than meets international best practice).

Third, the property rights of mining companies in SA can hardly be expropriated without compensation for the simple reason that this particular horse bolted 15 years ago amid insufficient protest by the industry.

STATE AS SOLE CUSTODIAN

When the Mineral and Petroleum Resources Development Act came into force in May 2004 it abolished the common-law principle that the private owner of land ordinarily owned everything above and below it, and was thus exclusively entitled to explore, extract and sell any minerals beneath it (or to consign these rights to others, as he saw fit).

The act severed the legal marriage between minerals and the land, making the state the sole custodian of all the country’s minerals, with the exclusive power to grant, renew and revoke any rights to prospect and mine for them.

These reforms have had a stultifying effect on the mining industry, making it much more difficult, time-consuming and costly for firms to acquire prospecting and mining rights, to use them as collateral to raise capital, and to transfer control over them (in what ought to be a straightforward sale of mineral rights).

After a lengthy legal challenge by agricultural lobby group AgriSA, the Constitutional Court ruled in a controversial decision in 2013 that the act did not bring about a wholesale expropriation (and thus did not trigger a duty to compensate), as it gave the state a different set of rights from those it had taken away from landowners (and their concessionaires). The court’s reasoning was criticised for, among other things, its failure to address how expropriation is defined and regulated in international law (which is in fact mandatory in cases concerning the bill of rights).

Under both customary international law and SA’s bilateral investment treaties with a number of foreign countries, it is recognised that expropriation can be effected indirectly and even incrementally. On this analysis, the act clearly brought about the wholesale expropriation of all pre-existing prospecting and mining seeking $375m in compensation for the rights.’ act s

The SA government avoided an international precedent on this question when, in 2010, it reached an undisclosed settlement with investors from Italy and Luxembourg, who had instituted international arbitration claims at the International Centre for the Settlement of Investment Disputes, expropriatory effect on their interests in SA granite mines. [Disclosure: this author represented the claimants in that arbitration.]

Customary international law is a mercurial creature, and states and scholars disagree on whether compensation for expropriation must be “adequate” or “appropriate”, and what those terms mean, but it is unquestionably forbidden to expropriate a foreign national’s property without any compensation at all.

INTERNATIONAL LAW

As a result, the SA constitution forbids it too, as it requires that customary international law not only be considered when interpreting the bill of rights, but also be honoured when applying any legislation. The constitutional amendment being contemplated by the ANC, as foreshadowed in the new draft Expropriation Bill, thus ought not to apply to foreign investors as a matter of constitutional principle as much as interpretation.

This constitutional guarantee, undergirded by international law, appears not to have been adequately understood or communicated by the SA government (nor, presumably, by its investment envoys).

Yet it may hold the key to assuaging prospective foreign investors’ concerns about the security of their interests in SA.

However politically unpopular, this principle of international law is something the government constitutionally cannot afford to ignore, and, paradoxically, could well use to its advantage.

By acknowledging and respecting the limits of land expropriation without compensation, under both constitutional and international law, the government would make it much easier for the SA private sector to attract much-needed capital from abroad.

This is especially true of the mining sector, which has already suffered a severe investment drought since the Mineral and Petroleum Resources Development Act’s uncompensated exploitation of mineral rights in 2004.

● Leon is a partner and Africa cochair at Herbert Smith Freehills LLP.