Webber Wentzel E-Alert: South African investment laws - key changes of which foreign investors should be aware
24 July 2018
24 July 2018
South African investment laws - key changes of which foreign investors should be aware
The Protection of Investment Act, 2015 (the Act) came into effect on 13 July 2018. By way of background, the South African government first began a review its investment laws and regulations following the case of Piero Foresti, Laura de Carli & Others v The Republic of South Africa launched under the auspices of the Washington DC-based ICSID in 2007.1 Following the review, South Africa terminated several Bilateral Investment Treaties (BITs) to which South Africa was a party. It then sought to "substitute" the treaty protections with domestic legislation, which ultimately led to the Act being passed.
Although the stated purpose of the Act is to protect foreign investors in South Africa, overall, the protections offered in the Act are substantially diminished when compared to the substantive standards contained in international treaties.
Notably, the Act will have no direct effect on any protections which foreign investors enjoy under international treaties; those protections are still governed by the international instruments from which they arise.
We set out below some key features of the Act which any investor should be aware of.
The Act sets out a national treatment standard, a physical security of property standard, and a right to transfer funds.
These are also standard protections in international treaty law.
The Act explicitly grants the South African Government the right to take regulatory measures in order to: redress historical, social and economic inequalities and injustices; uphold the rights, values and principles contained in the Constitution of the Republic of South Africa; and to promote and preserve cultural heritage, foster economic development, protect the environment; and achieve the progressive realisation of socio-economic rights.
This seeks to ensure that the rights of foreign investors cannot be interpreted in a way that would infringe on the government's right to implement regulatory measures that it sees as being in the public interest. While the Act sets forth various protections, there is a concern that these do not provide any greater comfort than those already included in the Constitution. More so, as the Act is ordinary legislation, it may be repealed, revoked or amended at any stage in the future.
Also, although the Act grants South Africa the right to take regulatory measures, this differs from the protection under investment treaties in that investment treaties would ordinarily protect investors from any adverse effects of such measures insofar as they result in an expropriation or unfair and inequitable treatment of the investor.
The Act does not provide for compulsory investor-state arbitration and subjects disputes under the Act to the South African domestic courts.
This is fundamentally different to the protections offered at international law through investment treaties, which not only enshrine generous protections in line with international law jurisprudence, but also ordinarily require disputes under the treaty to be submitted to a neutral arbitral tribunal.
Recourse to international arbitration has been explicitly removed.
Investors with grievances under the Act will only be able to request the South African Department of Trade and Industry to appoint a mediator and/or to approach a South African court or a tribunal or statutory body provided in any other South African legislation.
Unlike investment treaties, which prescribe compulsory investor-state international arbitration outside of South Africa before an international tribunal, the Act contains no compulsory referral to international arbitration at all. To the extent that international arbitration is mentioned in the Act, it may only be conducted as between two States (i.e., not involving the investor directly) and only with the consent of both States.
The impact of this on dispute resolution clauses in contracts concluded with the government after the date of the commencement of the Act is unclear. Section 13(5) of the Act states that "[t]he government may consent to international arbitration in respect of investments covered by this Act, subject to the exhaustion of domestic remedies. The consideration of a request for international arbitration will be subject to the administrative processes set out in section 6. Such arbitration will be conducted between the Republic and the home state of the applicable investor." It is arguable that the Act seeks to limit the government's ability to agree to any international arbitration in respect of any investment covered by the Act, by contract or otherwise, except as provided in section 13(5). An investment is very broadly defined in the Act. It is, however, likely that section 13(5) will be narrowly and contextually interpreted only to disputes arising out of alleged breaches of the Act.
The Act fails to address concerns over the neutrality of the forum for adjudicating any investor disputes, which is one of the key rationales for the investor-state arbitration regime which has become entrenched in international law and commerce since the 1960s.
The Act does not contain a most favoured nation treatment standard, and a fair and equitable treatment standard.
These protections have been the cornerstone of modern international investment law and their omission represents a significant departure from what has become a norm.
The Act curtails the possibility of claiming compensation significantly and alters the standard of compensation to what is "just and equitable" (to conform to the constitutional standard described above), rather than full market value compensation.
The remit of some of the Act's protections is unclear.
By way of example, section 8 of the Act provides that foreign investors and their investments must not be treated less favourably than South African investors "in like circumstances". The Act, however, does not define "like circumstances" and the factors which should be taken into account in determining whether there are like circumstances are so vague and broad that they have the potential to be used to discriminate against foreign investors.
1Case no ARB(AF)/07/01. This case was an investor-state arbitration in which foreign investors challenged (in terms of international investment treaties), among other things, the effect of the new mining legislation (the Mineral and Petroleum Resources Development Act, 2002) and certain aspects of the policy on black economic empowerment pertaining to mining interests.
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