The Protection of Investment Act, which became law on 13 July 2018, could deter foreign investment into South Africa, according to Ian Matthews, head of business development at independent investment banking firm Bravura.
President Cyril Ramaphosa activated the controversial Protection of Investment Act, by publication of a notice in the Government Gazette, on Friday 13 July. The Act, which was signed into law by former President Jacob Zuma in 2015, has been controversial from the start, says Matthews.
He says the Protection of Investment Act of 2015 has been criticised nationally and internationally for its approach with respect to a number of aspects. For instance, the European Union’s Regional Chamber of Commerce and Industry stated that foreigners are hesitant to invest in South Africa for fear that there will be a lack of protection over their investment.
The possibility that foreign investment assets might be expropriated without compensation is the main concern with the law, he says.
Previously, South Africa was party to a number of bilateral investment treaties (BIT’s), 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,” Matthews says. “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, he adds. 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. “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.”
Another 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.
“Access to international arbitration provides security to investors,” Matthews says. “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.”
Matthews concludes: “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.”