Promotion and Protection of Investment Bill opens up major row

New DTI Investment Bill disliked as damaging to FDI……

A draft Promotion and Protection of Investment Bill has come under serious fire from not only South African business groups but from foreign firms operating in South employing large numbers of local employees. Most have described the proposals as adding woes to an already damaged South African investment picture, adding yet further risk to the current economic downturn

Promoted by minister of trade and industry, Dr Rob Davies, the Bill will enable South Africa to trade ignoring existing bilateral investment treaties (BITs) between South Africa and other countries in the EU whilst extending protection to new investors from all other countries.

Davis says bi ltateral treaties irrelevant

Davis says that the new Bill if passed as it stands “will enable a comprehensive and uniform legal framework to govern investments in the country”.  He said a review of South Africa’s bilateral investment treaties had found that there was no correlation between the existence or absence of a bilateral treaty with a particular country and the flow of foreign direct investment (FDI) from the country.

Minister Davies has been warning for some time that such a review would take place and the draft, just closed for public comment, indeed makes a number of radical changes to South Africa’s  trading relations, which many trade law experts say brings further uncertainty to the investment climate when least wanted by the country.

Listing the uncertainties to FDI

The first of the many changes is that investors no longer have recourse to international arbitration. Under BITs at present, trading investors are allowed to have arbitration proceedings as laid down by World Bank rules.   International arbitration, for obvious reasons, is preferred by investors as it is impartial and not in the hands of the country invested in, as is promoted the Promotion and Protection of Investment Bill making it local.

The second major change relates to the compensation paid in the event of expropriation. The new Bill simplistically says that  “compensation must be just and equitable”, clearly creating uncertainty in the light of known statements by cabinet ministers and senior ANC politicians in South Africa on the subject of expropriation.

Events in other parts of Africa will no doubt leave investors uneasy despite the promises of minister Rob Davies that “protection for overseas investors will be in terms of South Africa’s Constitution”, which he said “provides significant and robust protection for investors and for property both domestic and foreign.

All local foreign investors, even those with a half acquired knowledge of South Africa’s political development, will have watched the appointment of a state market valuator to handle land reform expropriation.

Finally, an uneasy point for many is that the new draft Bill fails to provide the normal provision of a BIT with what is considered by most internationals as the necessary affirmation that investors will enjoy fair and equitable treatment. Therefore they might feel that without the full protection that is enjoyed by any South African investor in the country, they might feel in jeopardy without the normal assurances of equal competition or against local protection.

amchamlogo2One such critic of the new Bill is the South African structured American Chamber of Commerce (AmCham) instituted by South Africans in Johannesburg some thirty years ago. AmCham represents some 250 American multinationals registered to do business in South Africa, eighty of the biggest contributing R233bn to the SA economy in 2011, and employing some 150 000 employees, either directly and indirectly.

They say they know where the minister is coming from but agree with all the points made by trade law experts, confirming their deep concern that the draft Bill states compensation will be an “equitable balance between the public interest” and the party that is involved.

This is totally unsatisfactory, they say. Reducing compensation or describing compensation in a manner as proposed in the Bill will increase the risk for investors, the paper says. The AmCham submission, available on their website, says that the state’s ability to undertake acts harmful to an investment’s profitability or property rights in the manner described appears to provide less protection than the Constitution itself affords.

They add that there is a perception given by the proposals that fair and reasonable treatment between local and international business issues will not be provided. AmCham goes on to state “any investment that violates domestic legislation or foreign agreements should be dealt with through legal channels available, without limiting the rights or protections of the investment.”

Jeff Nemeth

Jeff Nemeth – President AmCham

AmCham says, “Clear assurances that capital relating to investment and returns can be repatriated is not given and the investor should not lose their basic rights as is proposed under this law”. They add, “Investors are jittery of the slightest possibility of expropriation of assets by government which is perceived, rightly or wrongly, to be a very real possibility in relation to the South African government’s priority objectives of industrial development; public welfare objectives and black economic empowerment.”

“This perception should be decisively addressed by government and should be firmly dealt with in the Protection of Investment Bill.  In its current form, the draft Bill does not offer investors assurance that predictable and stable policies are a government priority”, AmCham concludes.

Davies said both his ministry and department of international relations “have been engaging with those European countries with whom South Africa has bilateral investment treaties to inform them about the country’s plan to introduce the Bill and the termination of the BTI only takes place six to 12 months after, depending on the agreement in place.”

The minister recently told a meeting that South Africa had significant  foreign direct investment from the US, Japan, Malaysia, India and other countries, “and we have no bilateral investment treaties with them”.

AmCham and others say this is not the point and now is not the time to tinker with the investment climate, thus providing less clarity and less security for FDI given the current downturn in economic factors.

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