South Africa’s Protection of Investment Act was passed at the end of 2015, and will replace a series of decades-old bilateral investment treaties. Investors have voiced concerns about the new legislation, particularly with regard to dispute resolution and public interest provisions. Centurion takes a look at the new investment framework in this Knowledge Series article.
By Lovelyn Bassey and Joslyn Sithole, Centurion Law Group’s South Africa office
The Protection of Investment Act (no. 22 of 2015, known as the PIA) was assented to in December 2015 by President Jacob Zuma. The government’s decision to change South Africa’s investment framework has not been without controversy. Critics including the EU and US chambers of commerce have labeled the PIA it as ill-timed considering South Africa’s struggling economy, while others have said that the legislation’s underlying provisions and procedures are defective.
The PIA replaces a plethora of bilateral investment treaties (BIT) signed by the government since the early 1990s, initially with European nations, later with other African countries, and then with Canada and Russia, among others. South Africa has a total of 45 BITs, most of which are nearing their end. Pursuant to what many consider to be a unilateral decision by the government, existing BITs shall not be renewed but will instead be allowed to lapse, making the PIA the primary legislation for investment in South Africa.
Fairness and equitability
The PIA’s replacement of the BITs is not all doom and gloom. Some of the core principles of the bilateral treaties surrounding dispute resolution, protection of national/public interests, protection of investments, and fairness and equitability are included in the new legislation.
One of these principles, fairness and equitability, is embodied in Section 8 of the PIA. Going forward, there shall be no differentiation or “special protection” between a South African citizen and foreign investors, subject to compliance with “applicable legislation” (which shall include both domestic laws and international agreements). Therefore, the protection of national or public interests must be balanced with the promotion and protection of investments.
Notwithstanding the above, Section 12(1) expressly reserves the government’s right to redress “historical, social and economic inequalities”, “uphold rights guaranteed in the Constitution”, “promote and preserve cultural heritage and practices and indigenous knowledge”, foster “economic development, industrialization and beneficiation”, “achieve the progressive realisation of socio-economic rights” and protect “the environment and the conservation and sustainable use of natural resources”. Investors may be wary of the possibility of expropriation by the government, in which case an equitable resolution would have to be found to compensate the investor for losses suffered due to such expropriation.
South Africa is unarguably one of the global forerunners in formalizing through legislative frameworks a plurality of public interest principles and welfare goals. These extend well beyond the monitoring of commercial activities through Broad-Based Black Economic Empowerment regulations, competition law regulations and other public interest policies. While they may be viewed as redundant, it still comes as no surprise that public interest provisions are firmly embedded in this key investment regulation. One can argue that this type of continuous legislative intervention by the government has a negative impact on ordinary commercial activities, regardless of the motivation behind it. Ultimately it could create unhealthy commercial structures that make it more difficult to balance public interest considerations with maximum returns for the investors (while still complying fully with South African laws).
Dispute resolution and arbitration
Section 13, which deals with dispute resolution, may also make investors uncomfortable. It provides that an investor with a dispute with the government relating to an investment covered by the PIA may approach the Department of Trade and Industry to facilitate the resolution of the dispute. Of particular interest and concern is Section 13(5), which requires the investor to exhaust all domestic remedies and legal channels in South Africa prior to making a request to the government for the matter to be referred to international arbitration. This is a significant difference between the PIA and the BITs, with the effect that the South African legal system shall be the ‘court of first instance’ for all investment disputes. Previously, international law would have been applied. In addition, an investor would need the government’s consent to go to international arbitration. One can anticipate this would not easily be given.
In addition to the concerns highlighted above, the arbitration clause in Section 13 of the PIA is widely considered to strip investors’ protective amour, removing as it does the benefit of referring disputes to a neutral arbitration ground. This umbrella legislative provision has seen little enthusiasm from corporate South Africa. Investors may find comfort in the fact that South Africa, compared to other African states, is noted for its strong juristic institutions that are up to date with international commercial standards, and that have the ability to withstand political interference and follow the rule of law.
Although the nation’s courts and legal system are independent from the government and generally uphold the rule of law, they are also under significant pressure due to the backlog of existing cases. Arguably, the significant political pressure that comes to play when the government is a party to a matter cannot be ignored. Realistically, political risk is unavoidable in any international investment transaction. However, foreign investors can always assess and manage political risk to the extent that it shields them from extensive governmental interference.
The ramifications of the PIA on South Africa as a destination for foreign investment are yet to be seen. Supporting regulations and implementation are still required. It is our view, however, that save for the arbitration clause and the loss of ‘special treatment’, investors can still negotiate and tailor their contractual relationships in a manner that minimizes the risks arising from the PIA.