SA on right path with foreign investment bill

Jonathan Klaaren and Fola Adeleke

—Jonathan Klaaren and Fola Adeleke

EIGHT years ago, seven Italian foreign investors and another company incorporated in Luxembourg instituted a claim against SA at the International Centre for Settlement of Investment Disputes. This claim was based on the bilateral investment treaty (BIT) between SA and the governments of Italy and Luxembourg.

The investors alleged that SA had breached its obligations to foreign investors not to expropriate property because the Mineral Resources Petroleum Development Act and the Mining Charter had, through the introduction of the notion of state custodianship of mineral rights, eroded the common law right to minerals.

While it was eventually settled, at the heart of the dispute was a challenge to SA’s sovereign right to regulate, as permitted by the Constitution, and the right of any state to determine which regulatory measures are reasonable and justifiable in advancing critical public interests.

This dispute triggered the termination of BITs with some European countries at the end of 2013, part of a process that started in 2010 when Trade and Industry Minister Rob Davies announced a review of treaties to develop a framework that would aim “to achieve an appropriate balance between the rights and obligations of investors and the need to provide adequate protection of foreign investors, while ensuring that constitutional obligations are upheld and that the government retains the policy space to regulate in the public interest”.

Another of the outcomes of the 2010 review process was the decision to develop an investment law to codify and entrench investor protection. The Promotion and Protection of Investment Bill, which was introduced to Parliament last month, must thus be seen as an attempt to promote and protect investment in SA in terms of the Constitution, while balancing the public interest and the rights and obligations of investors. The bill provides a legal platform open to all and sends a clear message to foreign investors and the international community of SA’s new approach to investment protection, thereby enhancing the security and predictability of the country’s foreign investment regime.

Much has been said about whether BITs help foreign direct investment. Many criticised the government for terminating a number of its treaties. However, on closer examination, academic opinion based on empirical analysis suggests there is no direct correlation between BITs and the inward flows of capital. On the whole, the investors do not give particular credence to the legal form of a treaty.

Given the aim of the bill to protect public interests and safeguard the rights of investors, the government is pursuing important public policy objectives by giving protection for inward and outward investments and retaining policy space. The bill provides a good institutional environment for investors, which aims for a legal and policy framework attuned to sustainable development and inclusive growth.

Indeed, the approach taken by government may well have a proactive advantage of legislative clarity and influence even beyond our borders.

There is a growing international consensus that BITs, particularly early-generation ones, contain provisions that are imprecise and leave wide scope for inconsistent and unpredictable outcomes — especially through international arbitration with no appellate structure.

There is also growing awareness of deficiencies in international arbitration regard- ing its ad hoc nature and a perceived lack of transparency and legitimacy.

There are several things that support SA’s policy shift away from BITs. These include constitutional guarantees that mitigate the risks to foreign investors, the constitutionally mandated need to reclaim policy space from BIT practice, an unacceptably high level of unpredictability in interpreting BITs and the ambivalent empirical evidence on their importance in attracting foreign direct investment.

The bill is by no means a perfect law and there are a number of areas that can be improved. In our submissions to Parliament, we have suggested some specific amendments. As draft text for national legislation rather than for a BIT, the bill has necessarily modified a number of the tra- ditional investment protections. Parliament should ensure the absence of these standards does not lead to arbitrary discriminatory treatment of foreign investors.

Fellow Brics countries such as India and Brazil have adopted policy approaches that are consistent with the bill. In Brazil, the approach is to opt for co-operation and investment facilitation agreements that promote amicable ways to settle disputes and propose state-to-state dispute settlement as a backup.

India’s 2015 model BIT abandons the obligation on fair and equitable treatment, a position consistent with the 2012 Southern African Development Community model BIT, which opts for the principle of fair administrative treatment to replace the fair and equitable treatment protection.

Importantly, the bill tracks our Bill of Rights and provides that expropriation of property will be dealt with in accordance with the provision for the right to property in the Constitution. Section 25 permits the state to take legislative and other measures to redress the results of past racial discrimination. While some of SA’s BITs, including the SA-China BIT, provide that should expropriation occur compensation will be based on market value, section 25 of the Constitution provides that compensation will be “just and equitable”, an approach that is more considerate of SA’s social and historical context.

The procedural aspects relating to dispute settlement in the bill could also be improved. The bill provides for domestic dispute settlement through mediation, arbitration or the courts, and when these remedies are exhausted, it provides for state-tostate arbitration.

The approach taken in the bill is important for the development of local institutions. However, the bill could be improved with procedural considerations such as determining a set time period to initiate and conduct the facilitation of disputes for mediation by the Department of Trade and Industry. Further, there is no reference to the applicable law to guide international state-to-state arbitration.

The bill could also do with a clause that allows South African investors to make requests for state-to-state arbitration, with an administrative obligation on the state to give reasons when deciding the request.

Ultimately, the bill can be seen as taking an approach that is consistent with the emerging framework of global administrative law, applying SA’s domestic administrative law principles to its investment policy. This approach supports SA’s fledgling democracy, which should strive towards principles of transparency, participation and accountability.

Academic opinion suggests there is no direct correlation between BITs and inward flows of capital

Klaaren and Adeleke are with Wits University’s School of Law.

■