Out-Law News 3 min. read
25 Nov 2015, 9:52 am
The Department of Trade and Industry (DTI) said the bill showed the country remained open to foreign direct investment, with “strong protection for investors in a predictable investment environment”.
The bill is the result of a three-year review of South Africa’s investment regime, the DTI said. The review considered “the nature of about 3,000 international investment agreements (IIAs) and bilateral investment treaties that were signed in the 1990s”.
According to the DTI, the IIAs were signed before South Africa’s constitution came into force and provide “very firm guarantees to investors against direct and indirect expropriation, as well as guarantees against fair and equitable treatment”.
However, the DTI said the IIAs were “extremely expansive” in the way that they had been formulated and phrased, which “opened doors to litigation”. Over recent years there have been “multiple cases where individual investors have taken governments to international courts”, the DTI said.
South Africa’s trade and industry minister Rob Davies said: “Our central message is that we have seen over a period of time that the established international investment protection system has been recognised around the world as being in need of serious review and reform.”
Davies said: “Fundamentally, the underlying philosophy of the bill is to clarify the standard of protection that an investor may expect (in South Africa) and to promote all types of investments by creating a predictable business environment that is readily understandable to an investor.”
Addressing MPs in the bill debate on 18 November, Davies cited recent figures from the United Nations Conference on Trade and Development (UNCTAD) indicating that 99 governments around the world have been respondents to one or more known ‘investor-to-state dispute settlement’ (ISDS) claims.
Davies said the average cost of mounting a defence against such claims was almost $10 million in 2014, “but individual cases have generated significantly higher costs, including a recent case that cost over $120m”.
It is against this background that South Africa took a decision to review its regime, with similar reforms currently taking place globally, Davies said. “In developing the bill, we have taken into account all the concerns raised. Our aim is to modernise South Africa’s policy approach to foreign investment in view of national, regional and global developments.”
However, Davies said “it is not the intention or the mandate of the bill to develop the law in areas that are not directly in the scope of investment regulation”. He said the bill (12-page / 37.1 KB PDF) highlighted how section 25 of the constitution of South Africa “provides adequate protection to investors from arbitrary expropriation and deprivation”.
The DTI said the bill, which was approved by “overwhelming” number of legislators, has now been sent to the National Council of Provinces, after which it will be sent to President Jacob Zuma for final approval.
"Like a growing number of countries, South Africa has been very vocal about its desire to move away from the traditional form of investment protection offered by bilateral investment treaties and has already cancelled a number of BITs with European countries," said Peter Rosher, an expert in bilateral investment treaties at Pinsent Masons, the law firm behind Out-Law.com. "Concerns have been voiced by its trading partners who are concerned that the new law will significantly diminish protections which have attracted direct foreign investment into South Africa. Much will now depend on just how real the level of protection claimed to exist under domestic laws, including the South African constitution, proves in fact to be."
According to UNCTAD’s ‘2015 Investment Report’ (253-page / 8.90 MB PDF), “there is a pressing need for systematic reform of the global IIA regime”. The report said there were 42 new ISDS cases in 2014, bringing the total number of known treaty-based claims to 608.
Earlier this year, EU trade commissioner Cecilia Malmström said that EU investors are the most frequent users of the ISDS system and so "Europe must take the responsibility to reform and modernise it”. She said the EU “must take the global lead on the path to reform".
Malmström has previously described ISDS as "not fit for purpose in the 21st century” and wanting “the rule of law, not the rule of lawyers”.
