The world is changing fast and to keep up you need local knowledge with global context.
By Anthea Jeffery*
Net foreign direct investment (FDI) into South Africa was negative in 2014, with outward flows exceeding inward ones by some R13bn. Moreover, as Business Day reports, in the first quarter of 2015. “inward FDI recorded a negative R22bn… as foreign direct investors in South Africa pulled money out”.
In addition, the most recent (2015) report by A T Kearney on the world’s 25 most attractive investment destinations saw South Africa drop out of this group altogether. In previous years, the country not only made it into the top 25, but also came in about half way up the index. (In 2014, South Africa was ranked 13th best, while in 2013 it came 15th and in 2012 it was rated in 11th place.)
A spokesman for A T Kearney blames South Africa’s recent exclusion from the index on a lack of “regulatory clarity”. In addition, other emerging markets in the top 25 showed “a willingness to engage in economic reform” and a more “entrepreneurial attitude”.
Undeterred by these developments, the Department of Trade and Industry (DTI) last week unveiled a new version of the (still misleadingly named) Promotion and Protection of Investment Bill (the Bill). This new Bill, says the DTI, seeks to “clarify” and “codify” in South Africa’s domestic legislation “provisions typically found in bilateral investment treaties (BITs)”.
However, contrary to what the DTI asserts, the Bill still gives foreign investors very much less protection than most bilateral investment treaties provide: which is “prompt, adequate and effective compensation” and international arbitration to settle disputes.
Under the Bill, foreign investors will have to refer any dispute they may have with the South African government to the country’s own courts – the very courts the ruling African National Congress (ANC) has been trying for many years to bring to heel. Though the new Bill makes some provision for international arbitration, it allows this solely on a state-to-state basis, so excluding investor participation. Moreover, international arbitration will be available only with the Government’s “consent”, and only if domestic remedies have been “exhausted” – a process that could take years.
Instead of “prompt, adequate and effective compensation” (a formula which promises the swift payment of market value at minimum), foreign investors will find their rights on expropriation governed by the Expropriation Bill of 2015 (the Expropriation Bill), now before Parliament.
If adopted in its current (and unconstitutional) form, the Expropriation Bill will prevent South Africa’s courts from ruling on the validity of any expropriation. It will also give investors a mere 60 days to sue on the compensation payable, failing which they will be “deemed” to have accepted whatever amount the Government has offered.
Investment Bill: Still plenty of reason to worry – Anton Alberts: FF Plus MP says draft legislation greatly wa… http://t.co/7ZshgdBCq5
— Politicsweb (@Politicsweb) July 29, 2015
At the same time, the new Investment Bill does reflect one big advance. In response to widespread resistance (spearheaded by the IRR), the Bill no longer allows the State to take property without having to pay compensation at all.
The 2013 version of the Bill would have allowed this, provided the State took the property in question as “custodian”, rather than as “owner”. These provisions have gone. The new Bill reiterates that foreign investors will be treated equally with South African ones, but only “in like circumstances”. Some foreign investors have expressed concern that they might thus be penalised if they have done less than local companies on black economic empowerment (BEE) requirements, for instance.
The new Bill includes a long list of the factors to be taken into account in assessing whether circumstances are indeed “like”. This list includes “the effect of the foreign investment” on the country, “the effect on employment”, and “factors relating to the foreign investment”, but the wording used is often too vague to provide much guidance.
In addition, equal treatment for foreign investors could prove illusory, as the Bill indicates that the “level of security” provided to them will also depend on “available resources and capacity”. Even if “like circumstances” are found to exist and foreigners merit equal treatment with South African investors, there is little for their comfort in this. For what South African investors now confront is not only the Expropriation Bill, but also a host of other damaging bills and statutes.
What these legislative interventions have in common is that they:
- undermine property rights (examples include the Expropriation Bill, the re-opened land claims process, and a further bill seeking to vest all agricultural land in the “custodianship” of the State);
- limit business autonomy (in particular, through new BEE rules on ownership, managerial appointments, and preferential procurement); and
- increasingly seek to bring about the regulatory or “indirect” expropriation of businesses, for which the Expropriation Bill will provide no compensation.
Indirect expropriation arises where the State itself does not acquire ownership, but regulation nevertheless deprives owners of many of the usual powers and benefits of ownership. One example is the Private Security Industry Regulation Amendment (PSIRA) Bill of 2012, still to be signed into law, which will require foreign security companies to transfer 51% of their equity to South Africans.
Also relevant here are the new BEE generic codes of good practice, which are already putting great pressure on small firms, in particular, to transfer 51% of their ownership to BEE investors at heavily discounted prices.
‘New’ Promotion of Investment Bill removes most significant existing protections for int’l investors contained in SA’s investment treaties.
— Peter Leon (@petersgleon) July 28, 2015
All these laws make for an onerous and constantly shifting policy environment. This, of course, erodes the regulatory certainty that investors require before they can prudently commit their capital and other resources to the country.
In addition, there are many practical obstacles to doing business in South Africa. Among these are the Eskom debacle; the country’s parlous education system (ranked fourth last in the world); its fractious labour relations (rated worst across the globe); its high input costs and limited competitiveness, its unemployment crisis and resulting social instability; and a government so inefficient that this itself has become one of the worst obstacles to doing business here.
Both foreign and local investors thus have good reason to give South Africa a wide berth. But the Government seems careless of the enormous hardship this will cause. This hardship will fall most heavily on the 8.7m people now unemployed, who have little prospect of ever finding jobs in the hostile business environment the ANC has fostered.
* Anthea Jeffery is the head of policy research at the Institute for Race Relations. She is also the author of People’s War: New Light on the Struggle for South Africa and BEE: Helping or Hurting?
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