New steps to safeguard investments
Some critics question future inflows of capital as bilateral treaties get the chop
THE object of the Promotion and Protection of Investment Bill is to provide a legislative framework for the protection of investors, the promotion of investment and to achieve a balancing of the rights and obligations that apply to all investors. It is designed to treat all investors equally, irrespective of whether the source of the investment is foreign or domestic.
The bill was published for public comment following the government’s somewhat controversial decision to terminate existing bilateral investment treaties. The government had signalled its intention to do so for some time.
A bilateral investment treaty is a bilateral treaty between two states by which each agrees to afford protection and benefits to investments made by citizens and companies of the other state and is intended to afford protection beyond that which the investor could expect under the contractual relationship. Bilateral investment treaties may protect an investor against expropriation or nationalisation. The treaties usually contain an appropriate dispute resolution mechanism entitling the investor to commence international arbitration proceedings against a state that is in breach of the treaty. This avoids an investor having to attempt to exercise recourse against the state in the state’s own domestic courts.
Many of the bilateral investment treaties which are being terminated contain a phasing-out period. In those circumstances there will still be protection under the treaties for some years to come for investments made before the treaties were terminated.
There are many countries where there are no reciprocal bilateral investment treaties with SA. In regard to investments flowing from those countries and from countries where the phasing-out period mentioned has expired, protection of investments will fall to be dealt with in terms of the bill (assuming it is eventually passed in its current form) and our constitution.
One of the essential features of the bill is that it will not only apply to investments introduced from outside the republic, but will also afford equal protection to local investors. However, any recourse against the state in terms of the law will no longer be possible by reference to international arbitral pro-
Any compensation in terms of the bill is required to reflect an equitable balance between the public interest and the interests of those affected
ceedings (unlike in terms of the bilateral investment treaty unless the state were specifically to agree otherwise, which is an unlikely scenario). In a dispute with the state regarding an investment, a disgruntled investor will need to seek recourse through the local domestic courts or similar competent bodies, which may include a referral to arbitration in accordance with the South African Arbitration Act.
The bill sets out the principles relating to expropriation of investments. This may only be done in accordance with the constitution, “in terms of a law of general application for a public purpose or in the public interest”, under due process of law against just and equitable compensation.
The bill sets out a number of events which may be prejudicial to an investor and yet will not amount to expropriation. What will in terms of the bill amount to expropriation is far more limited than what amounts to expropriation in terms of a bilateral investment treaty. In this respect at least, a foreign investor would be afforded less protection than under a typical bilateral investment treaty.
In addition, the valuation of the loss which an investor faced with an expropriation would be entitled to receive is likely to be more limited compared to that which would be received under a bilateral investment treaty. Any compensation in terms of the bill is required to reflect an equitable balance between the public interest and the interests of those affected. Particular circumstances set out in the bill, including the current use of the investment, the history of acquisition and use of the investment, the market value of the investment and the purpose of the expropriation, must be taken into account.
An investor affected by the expropriation would have the right to a review by a competent court, including in respect of the valuation, although it may be that the court’s powers in respect of the valuation are limited to whether the valuation was properly done in accordance with the factors which have been set out.
It remains to be seen whether the termination of the bilateral investment treaties and the introduction of the bill will have a negative impact on the inflow of capital and investments into SA as some critics predict or whether, as Minister of Trade and Industry Rob Davies suggests, foreign investors will consider that their position is adequately protected and that investment in SA will continue to be safe and secure.
Davies has publicly stated the bill will modernise SA’s legal framework for foreign investment. SA is not alone in the review of its bilateral investment treaties and investment policies.
MODERNISATION OR MISTAKE?