“South Africa cannot afford the proposed Investment Bill. It puts at risk new foreign investment from the Western nations that are the country’s main investors. It also breaches South Africa’s legal obligations under a binding Trade and Investment Protocol adopted by the Southern African Development Community (SADC). In addition, the Bill’s wording is often too vague to pass constitutional muster, while the consultation process around it has been too short”, said Dr Anthea Jeffery, Head of Policy Research at the IRR (Institute of Race Relations), at a Free Market Foundation media briefing on 27 October.
The misleadingly named “Protection of Investment Bill” is likely to destroy foreign investors’ already fragile confidence in the country. This in turn is likely to deprive South Africa of the additional foreign direct investment (FDI) vital to both growth and jobs. “Without a complete rewrite to align the Investment Bill with the SADC Protocol, which is binding on South Africa and cannot simply be ignored, Parliament should reject the Bill”, said Jeffery.
Unlike the Investment Bill, the SADC Protocol complies with international best practice in that it:
• protects foreign investors against nationalization and expropriation (both direct and indirect),
• guarantees market-value compensation, and
• gives investors the right to take disputes to international arbitration.
By contrast, the Investment Bill allows international arbitration only with the South African Government’s ‘consent’, making this a meaningless ‘right’. It also fails to provide any clear protection against expropriation – and especially against expropriation of an ‘indirect’ kind.
Indirect expropriation occurs where the Government does not take ownership, but its regulations nevertheless deprive investors of many of the powers and benefits of ownership. Indirect expropriation will occur, for example, if the Government demands that foreign companies transfer 51% of their equity to South Africans. Such a demand is already evident in the Private Security Industry Regulation Amendment (PSIRA) Bill of 2012, that has been adopted by Parliament but has yet to be signed into law by President Jacob Zuma.
Indirect expropriation will also occur if the Government demands that 51% of the equity of South African companies be transferred to black economic empowerment (BEE) partners. It may also be evident where the State takes ‘custodianship’ (rather than ownership) of land or other property. This has already occurred under the Mineral and Petroleum Resources Development Act (MPRDA) of 2002, through which the State took custodianship of the nation’s mineral resources (two thirds of which were previously privately owned). In addition, the State now plans to take ‘custodianship’ of all agricultural land under the Preservation and Development of Agricultural Land Framework Bill of 2014.
When indirect expropriation takes place, no compensation is likely to be payable under the Investment Bill. When direct expropriation occurs, the compensation due is likely to be significantly less than market value, as market value will be only one out of five factors to be taken into account. In addition, the compensation payable may be still further reduced, as the Investment Bill (in one of the various clauses too vague to be constitutional) says that “the level of security” to be provided to investors will also depend on the State’s “available resources and capacity”.
The SADC Protocol, with its important guarantees, is similar in many ways to the bilateral investment treaties (BITs) South Africa concluded in the mid 1990s with 13 European states. Yet, beginning in 2012 – without Parliamentary debate or much media coverage – South Africa has quietly terminated its BITs with these countries. At the same time, similar BITs with China, Russia, Cuba and Iran have been retained.
The United Kingdom has long been a particularly important source of investment in South Africa. In 2013, the value of direct and indirect investments from the UK thus stood at some R1,650bn, or close on 40% of foreign investments then worth some R4,300bn. Yet in August 2013, South Africa’s BIT with the UK was unilaterally terminated without any parliamentary or public debate. Potential investors from the UK – who have a myriad of other countries to choose from in making their investment decisions – are now supposed to rest content with the flawed provisions of the Investment Bill.
The European Union Chamber of Commerce and Industry in Southern Africa – which speaks for some 2,000 EU companies which have cumulatively generated some 300,000 direct and 150,000 indirect jobs in South Africa – has expressed dismay at the termination of these BITs and the content of the Investment Bill. So too has the American Chamber of Commerce in South Africa (Amcham), which represents some 600,000 American companies also employing hundreds of thousands of South Africans.
Many potential new investments from the EU and the US are on hold while companies seek clarity on government policy and eye more investor-friendly African states. Yet South Africa cannot afford to jeopardise future FDI. It certainly cannot afford to do so at a time when net FDI inflows have already turned negative (-R22bn in the first quarter of 2015) and South Africa has dropped right out of the top 25 investment destinations listed in the A T Kearney index for 2015. (Even without the Investment Bill, South Africa’s decline on this index has been precipitous, for in 2014 it was ranked 13th best among the top 25 nations.)
The Government seems willing to put fresh investment from the West at risk while it seeks out more investment from China and Russia. Yet the West has contributed 85% of SA’s cumulative FDI (now worth some R1,600bn) and 90% of its indirect investment (now valued at some R2,700bn). By contrast, the value of direct and indirect investment from China now stands at roughly R75bn, while investment from Russia has been lower still.
If FDI falls further in the light of the terminated BITs and the Investment Bill, warns Amcham, the consequences will be “too dire to contemplate”. Adverse effects are likely to include a weakening rand, runaway inflation, higher interest rates and debt costs, and inevitable job losses.
In addition, as Jeffery has stressed, South Africa cannot lawfully adopt an Investment Bill that directly contradicts the SADC Protocol. The DTI’s response is that the Protocol is “under review” and is likely to be changed. However, any revision requires the support of 75% of SADC members and could take four or more years to secure.
“In these circumstances,” says Jeffery, “the Investment Bill must either be rewritten to comply with the key provisions in the SADC Protocol, or Parliament must decline to adopt it.”
While South Africa is busy devising laws that inhibit trade, stifle competition and frighten away foreign investors, its neighbours are doing the opposite. The impact is already obvious: the South African economy is struggling to grow at even 1.5% of gross domestic product (GDP), while various other African countries are achieving growth rates of 4% of GDP or more. Yet without much higher growth rates, South Africa cannot overcome its unemployment crisis or meet the ruling party’s promise of “a better life for all”.