The world is changing fast and to keep up you need local knowledge with global context.
JOHANNESBURG — I don’t quite know what to make of President Cyril Ramaphosa’s mixed messages any longer. On the one hand, he travels to countries such as the UAE and Saudi Arabia, seemingly signing multi-billion rand trade and investment deals. On the other hand, Ramaphosa signs Zuma-era laws in that are interpreted to be anti-investment. The honeymoon is over for Ramaphosa, but now South Africa needs sensible decision making more than ever because Moody’s is waiting in the wings with a potential downgrade-to-junk decision come later this year. The optics will be key if SA wants to dodge that bullet. – Gareth van Zyl
By Ian Matthews*
President Cyril Ramaphosa activated the controversial Protection of Investment Act, by the publication of a notice in the Government Gazette, on Friday 13 July. The Act was signed into law by former President Jacob Zuma in 2015, and foreign investors were waiting on tenterhooks as to the commencement date of the law. The law was controversial from the start, with foreign entities complaining it will reduce their protection in SA, and may make them disinclined to invest.
Matthews points out that the Protection of Investment Act of 2015 has been criticised nationally and internationally for its approach with respect to a number of aspects. The European Union’s Regional Chamber of Commerce and Industry stated that foreigners are hesitant to invest in SA for fear that there will be a lack of protection over their investment.
Main concern with the Act – can foreign investment assets be expropriated without compensation?
Matthews explains that previously, South Africa was party to a number of Bilateral Investment Treaties (BIT’s), which are international investment agreements that ensure countries are bound to treat investors from other countries fairly. “A key aspect to BITs is that they contain clauses which state that in the event of assets being expropriated from foreign investors, these investors must be adequately compensated. For expropriation to be lawful, according to BITs, it must occur against compensation, which should be ‘prompt, adequate, and effective’ or ‘immediate, full and effective’. This means that the compensation for expropriation to be paid to investors must reflect the market value of the expropriated investment.
The BITs are now replaced by the new Protection of Investment Act. The expropriation clause in the Act intentionally mirrors Section 25 of the Constitution. It states that foreign investors have the right to property as provided for in the South African Constitution and may only be expropriated for a public purpose or in the public interest and subject to compensation (the amount of which and the time and manner of payment of which have either been agreed to by those affected or decided or approved by a court). “This is where the concern lies” says Matthews, “because BITs provided a safety net in that compensation must be ‘prompt, adequate, and effective’ or ‘immediate, full and effective’ and the Protection of Investment Act omits this.”
Foreign entities will no longer have the protection of international dispute resolution
The other area of concern is dispute resolution. The Protection of Investment Act states that if an investor has a dispute regarding an action taken by the South African government, they may within six months request the Department of Trade and Industry to facilitate the resolution by appointing a mediator. A foreign investor may also approach any competent court, independent tribunal or statutory body within South Africa for the resolution of the dispute.
Matthews says, “Access to international arbitration provides security to investors. In case of a dispute, the settlement mechanism takes the form of international arbitration, often under the auspices of the World Bank’s ICSID (International Centre for the Settlement of Investment Disputes), referred to as investor-state dispute settlement. Foreign investors could feel prejudiced in that the arbitration process will now occur in South Africa, and the process is at the mercy of the Minister of the Department of Trade and Industry. The Act does go on to state that if all domestic remedies have been exhausted the South African government may consent to international arbitration, but it is not clear how long and at what point this would be deemed to have occurred.”
Negative impact on Foreign Direct Investment
The Minister of the Department of Trade and Industry, Rob Davies, announced in 2014 that BITs will be replaced with the Protection of Investment Act. Since 2015, the South African government began cancelling BITs as these came up for renewal. So far, BITs have not been renewed with European Union member countries that include Belgium, Denmark, Germany, Luxembourg, Spain, Switzerland and the Netherlands.
Matthews says that it should be noted that much of South Africa’s foreign direct investment (‘FDI”) comes from these countries whose BITs have been terminated. The European Union’s Regional Chamber of Commerce and Industry stated at the time that the withdrawal of the BITs does not reflect well on SA. It sets the scene of a developing country struggling for power and wanting to dominate foreign investors, rather than an attitude of wanting to work together for the benefit of both parties.
Matthews notes that SARB statistics show that FDI into South Africa declined from c. R76 billion in 2008 to just R17.6 billion in 2017. A UN report, the ‘Global Investment Trends Monitor’ indicates that in 2015 FDI into South Africa fell by 74% to $1.5bn. However, the Department of Trade and Industry claims that there is very little to no correlation between investment inflows and BITs.
All of the above would seem to be odds with President Ramaphosa’s $100 billion investment initiative that was announced a couple of months ago. It would not seem that the cancellation of BIT’s will assist in making investors confident of investing into South Africa. In particular, it is noted that the gazetting of the legislation was at or about the same time that the UAE announced its commitment to investing $10 billion into South Africa which was as a result of initiatives by the President and his counsel.
Matthews concluded: “An uncertain regulatory landscape will not instill confidence in foreign investors, something that our economy can ill afford. It is critical now that the South African government swiftly adopts a stance on investment protection for foreigners and makes explicit the definitions of when and how this could occur without compensation. The various Acts and laws that affect expropriation and compensation must be finalised, harmonised and promulgated in order for foreign investors to factor in this risk.”
- Ian Matthews, Head of Business Development at Bravura, an independent investment banking firm specialising in corporate finance and structured solutions.
Cyril Ramaphosa: The Audio Biography
Listen to the story of Cyril Ramaphosa's rise to presidential power, narrated by our very own Alec Hogg.