South Africa’s current radical approach to investment protection is raising questions amongst foreign investors. The country’s new Protection of Investment Act (the Act) marks a change from the safeguards previously afforded to investors in bilateral investment treaties (BITs).
BITs are valuable to foreign investors, as they provide i) an international, impartial forum for dispute resolution, ii) possible causes of action in addition to contract provisions, and iii) a substantial, albeit non-binding, body of law on issues such as quantum of compensation.
Beginning in late 2012, South Africa began terminating European BITs which had been in place since the mid-1990s. BITs with Austria, Belgium-Luxembourg, Denmark, France, Germany, the Netherlands, Spain, Switzerland and the UK have all been terminated, and reports suggest that South Africa will soon cancel its remaining European BITs. However so-called “sunset clauses” ensure that existing investors may still be able to rely on the protections found in the terminated BITs for the next decade or more.
If South Africa does proceed down the current path of terminating all European BITs, as it seems it will, investors will primarily be concerned that, should their investments be expropriated, they will no longer have immediate recourse to international arbitration. Rather, as prescribed by the Act, they will have to resort to domestic mediation. Investors can also approach the South African courts. Only when “domestic remedies” have been exhausted will the government apparently “consider” consenting to international arbitration, which will be between South Africa and the investor’s home state (as opposed to the investor itself). Clearly there is considerable uncertainty as to how such a regime will work.
The Act prescribes that “investors have the right to property in terms of section 25 of the Constitution”. While the amount of compensation payable under the Constitution for an expropriated asset must be ‘fair and equitable’, it must reflect a balance between public interest and the interests of the affected investor, which may not amount to the fair market value of the expropriated asset. A counterbalance appears in the recently adopted Expropriation Act which provides that compensation should, in addition to being ‘just and equitable’, have regard to the market value of the property as well as a number of other factors. Crucially, though, the Expropriation Act does not make clear the point in time at which market value would be calculated. A valuation after the expropriation measures become known will likely be less.
The Act also provides that foreign investors will automatically be subject to measures including, among others, “redressing historical, social and economic inequalities and injustices” and “promoting and preserving cultural heritage and practices, indigenous knowledge and biological resources […] or national heritage”. The effect of such broad language is hard to predict, at least until it has been tested in the courts.
South Africa is not alone in moving away from BITs. In recent years, Indonesia, Ecuador, Venezuela, Bolivia, the Czech Republic and Poland have all terminated or signalled their intention to terminate BITs. While this may not encourage investors, those investing in South Africa should, at a minimum, be justly and equitably compensated in the event that their investments are expropriated.