THE Foreign Investment Bill which is ready for review by a Cabinet committee, is meant to fill the vacuum left by the government’s sudden and unilateral severance of bilateral investment treaties with Belgium and Luxembourg last year.
The bill will replace bilateral investment treaties. Its aim is to provide certainty to the protection of foreign investments, but uncertainty remains as treaties are being terminated despite the law not yet being in place. This is causing "jitters" among investors averse to any form of policy uncertainty.
"It is definitely risky," says Trade Law Centre of Southern Africa director Trudi Harzenberg.
Further severances are in the pipeline as Trade and Industry Minister Rob Davies wants to limit the use of such treaties to circumstances where there are "compelling" economic or political reasons for doing so.
At the 11th hour, the government informed its foreign partners that the treaties involved would not be renewed, even though an overarching law to bring uniformity and certainty to the protection of foreign investments, was not yet in place.
Trade Law Chambers director Rian Geldenhuys says foreign investors are concerned with protection from expropriation, both in the bill itself and in the process leading up to the promulgation of the act. If the bilateral treaties — which provide for recourse to international forums to enforce rights — are terminated without alternative mechanisms being put in place, investors will be nervous. It would be prudent to keep the treaties until the bill is signed into law.
Work on the bill — based on a review done by the Department of Trade and Industry from 2007-10 — is far advanced and ready for submission to an interministerial Cabinet committee.
A new model of bilateral investment treaty will also be developed for use where necessary. Australia, Brazil, Canada, Norway, the US and Sweden have also conducted reviews of their investment protection treaties, which have often been plagued by ambiguity.
Department of Trade and Industry deputy director-general Xavier Carim told Parliament recently that a key finding of South Africa’s review is that while foreign direct investment is to be welcomed, its benefits are not automatic.
Regulations are required to balance investment protection with measures ensuring that it supports national development and establishes "beneficial linkages to the national economy, augments domestic financial resources, fosters enterprise development and enhances the technology, skill and knowledge base of the economy".
An instance where these two objectives came into conflict was the dispute declared by Italian granite companies in 2006 over the requirement by the newly promulgated Mineral and Petroleum Resources Development Act that mining companies must apply for the conversion of their old order mining rights into new order mining rights.
Granting the new rights would depend on compliance with demands for socioeconomic transformation as had been outlined in the Mining Charter.
The companies have said this amounted to the unlawful expropriation of their rights without compensation. However, they eventually withdrew their claim before the International Centre for the Settlement of Investment Disputes in The Hague.
The case highlighted the need for an approach which gives investors protection but also recognises the right of the state to regulate in the public interest in areas such as black economic empowerment, the environment or public health.
Mr Carim says the new bill will bring provisions dealing with compensation in the event of expropriation into line with the constitutional provision of "just and equitable" compensation instead of the "market value" protection of many treaties.
Mr Carim told Parliament’s trade and industry committee South Africa has concluded about 15 bilateral investment treaties from 1994 to 1998, mainly with European countries, in a bid to reassure investors that their investments would be secure under the new democratic government. Other treaties followed, most of which were signed but not ratified.
The departmental review found that the dispute settlement mechanisms in the treaties are often contentious and the system is fragmented, with no common standards across different treaties.
Ambiguities in turn lead to inconsistent interpretations and the treaties are sometimes in conflict with national legislation and the constitution.
A key finding of the review is that there is no clear relationship between bilateral investment treaties and increased inflows of foreign direct investment into South Africa, much of which comes from countries with which South Africa has no treaty and vice versa.
On the basis of these findings the Cabinet decided in 2010 that the legal framework for South Africa’s investment protection should be strengthened and modernised.
It recognised that the relationship between the treaties and foreign direct investment was ambiguous and the treaties "pose risks and constrain government’s ability to regulate in the public interest", Mr Carim said.
The US and Canada have fundamentally overhauled their bilateral investment treaties, Australia’s treaties excludes provisions for disputes between the state and investors, and Brazil refuses to enter into such treaties at all.