New steps to safe­guard in­vest­ments

Some crit­ics ques­tion fu­ture in­flows of cap­i­tal as bi­lat­eral treaties get the chop

Business Day - Business Law and Tax Review - - BUSINESS LAW & TAX REVIEW - JEF­FREY KRON & AVASTHI KOLLOORI

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.



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