SA foreign direct investment obligations & Promotion and Protection of Investment Bill [B18-2015]: seminar

Meeting report

Opening Remarks
In welcoming everyone to the seminar, the Chairperson remarked that a fresh investment paradigm lies on the horizon.

United Nations Conference on Trade and Development (UNCTAD) briefing
Dr James Zhan: Director of Investment and Enterprise of UNCTAD introduced five key concepts:
1. Global Context
2. FDI in South Africa’s Economy
3. Regulatory Framework of Foreign Investment
4. South Africa’s Investment Bill
5. Aspects beyond Protection: Access, Facilitation, and Coherence

Dr Zhan remarked that investment practices are evolving globally, and the Promotion and Protection of Promotion and Protection of Investment Bill will play a crucial role in helping South Africa evolve with the world. Investment globally is multi-lateral and multi-faceted, and though there is no international investment regulatory agency akin to the WTO, there is an international investment regime with almost 3 300 treaties. On average, investment treaties are made two to three times a week. UNCTAD provides assistance to this regime. At the moment, around 100 countries are involved in one or more negotiations involving investment treaties. The proliferation of treaties has given rise to over 600 investor arbitration legal cases, or investor-state dispute settlement (ISDS) cases, most commonly around mining and electricity. Claims range from 5 million to 2.5 billion USD. 60% of cases were decided for the investor rather than the state.

The investment paradigm is shifting to support sustainable development. As was apparent in the UNCTAD October 2014 meeting, reform of international investment regimes is necessary to better benefit all stakeholders. Therefore, UNCTAD, at the behest of its 190 member states, has formulated a new Investment Policy Framework to shift away from the old emphasis on totally free investment.

Global Foreign Direct Investment (FDI) flows have generally grown in the last 20 years, albeit a drop-off in 2008, with developing countries reaching their highest point ever in 2014. For South Africa, FDI inflows have been bumpy annually, but also have steadily increased in the last 20 years. In 2014, South Africa had decreased from 2013 to 5.3 billion USD. The United Kingdom remains a key source of FDI investment stock. Dr Zhan stated that foreign investment can play a greater role in South Africa’s economy, and more needs to be done.

There are many kinds of determinants that affect foreign investment, grouped into three categories: economic determinants, policy determinants, and facilitation of investments. Therefore, the regulatory framework only comprises one part of the process of attracting foreign investment, and there are also other kinds of policy determinants. The UNCTAD Investment Policy Framework for Sustainable Development had a global launch including South Africa and includes investors, member states, and civil society representatives. The Policy has three areas of focus: national investment guidelines, international investment guidelines, and an action menu that accounts for all types of countries. Dr Zhan emphasised that policy must account for protection, access, and facilitation.

Dr Zhan commented on the Promotion and Protection of Investment Bill that it reflects the global paradigm shift on investment policy and the core principles of UNCTAD’s Investment Policy Framework. The Bill also includes investment dispute prevention mechanisms, which is in line with international norms. The Bill opts for the exhaustion of domestic remedies followed by state-to-state resolution. This is one option, and the international community has debated this option. The UNCTAD has produced a pros and cons list for the issue of dispute settlement if MPs are interested. The Bill also accounts for determination practices. The Bill bridges the gap between national legislation and international agreements. The Bill should serve as a guideline for international trade, whether it be free trade agreements or regional alliances. There may be a need for further strengthening of foreign investment facilitation and promotion. In the over 3 000 international investment treaties, most of these treaties focus on protection rather than promotion. Investment treaties may tip the risk/return balance, especially in developing countries. However, there are many factors within the three determinants mentioned earlier to also consider. Dr Zhan found the Bill to be a good balance between investor protection and Government’s right to regulate.

Beyond protection, the UNCTAD also finds access, facilitation, and coherence worthy of consideration. Access, also called openness or liberalisation, must be managed alongside government’s right to regulate. It is very important for foreign investment to have access to countries. This applies both to international agreements and unclear regulatory procedures. Goals set out by the World Investment Report (WIR) 2014 will require the filling of a 2.5 trillion investment gap internationally. There needs to be a big push for all kinds of investment, which will require serious facilitation. The WIR 2014 identified six action packages:
- a new generation of investment promotion and facilitation
- reorientation of investment incentives
- regional Sustainable Development Goals (SDG) investment compacts
- new forms of partnerships for SDG investment
- Enabling a re-orientation of financial markets
- Changing the global business mindset to focus on responsible investment.

These policies acknowledge that investment is a means to an end for overall national development. A coherent approach is necessary to allow all policies for development to work together. We must always work to improve investment policy.

Dr Zhan reminded the Committee that the UN is happy to assist South Africa in these matters and noted the creation of investmentpolicyhub.org as a consolidated source for information.

Discussion
The Chairperson thanked Dr Zhan for his presentation and his expertise. She reminded the Committee that this is a seminar, and opened the discussion.

Mr A Williams (ANC) asked how the world economic slowdown is going to affect UNCTAD’s new approach? Is it common for 20% of treaties to be protested? What was it like 20 years ago?

Mr D Macpherson (DA) expressed surprise that UNCTAD likes the Bill when it has been criticised by foreign investors, foreign government, local investors, and domestic political parties. He supposed that perhaps UNCTAD is unfamiliar with the local situation in South Africa. He pointed to the "like circumstances" clause of the Bill, and commented that the clause gives the South African Minister wide powers in making these decisions and applying various domestic laws to foreign investment. He asked if Dr Zhan has considered how all the current draft legislation in Parliament, including the Private Security Industry Regulation Bill, the Mineral and Petroleum Resources Development Amendment (MPRDA) Bill, the Expropriation Bill, and the Regulation of Landholding Bill, will affect UNCTAD’s opinion.

Mr M Kalako (ANC) commented that any investment policy will first consider the national interest. Have you taken into account South Africa’s history? He noted that two worlds existed and still exist in South Africa. What areas of the Bill are problematic for foreign investment? He wondered why foreign investors invest in war-torn places that cannot guarantee protection of investor rights. He asked again whether UNCTAD considers the specific history of countries. He felt that the bills referenced by his colleague work to remedy South Africa’s past, and he asserted that South Africa is a stable country.

The Chairperson asked which of the G7 countries the UNCTAD has worked with. The Chairperson wanted to learn about the new curriculum via email. She noted the political parties present at the meeting.

Mr Macpherson agreed that stability of a country is very important for foreign investment. One of the key concerns of the international community about the Bill is the efficient settlement of dispute. An investor would now be subjected to the Expropriation Bill and this does not give certainty. He was very concerned about how domesticated foreign investors would become in South African law. He also noted that commentators worry that the Bill will be marked unconstitutional.

Dr Zhan responded that the six action packages of UNCTAD account for global economic slowdowns. Challenges include recovery of investment flows and ensuring the correct destination for investment flows. In the past, there were not nearly as many investment dispute cases; it is certainly a recent phenomenon and correlates with the recent proliferation of treaties. He pointed out that there is 27 trillion USD of foreign investment stock worldwide, with almost 100 000 multi-national companies, to put the number of cases into perspective.

Dr Zhan admitted that his knowledge of South African issues was not as great as the Committee, but hoped that his value add would be that of an outside, internationally travelled perspective. UNCTAD has not studied carefully the other bills mentioned. It is widely debated for South Africa to shift from an Investor/State to a State-to-State arbitration system for dispute settlement.

Dr Zhan repeated that UNCTAD would be happy to do a more in-depth analysis on the pros and cons of the Bill. He admitted again that, from an outside perspective, he only generally understood South Africa’s struggle. Some new treaties do factor in social responsibility of government. He said that it is not abnormal for foreign investors to be bound by domestic laws; the important thing is non-discrimination between foreign and domestic investors.

The Chairperson was glad to hear that UNCTAD has worked with developed countries and reminded the Committee to study the Bill and work on formulating an opinion on the Bill.

DTI International Trade and Economic Development Division briefing
Ms Xolelwa Mlumbi-Peter, DTI Acting Deputy Director General: International Trade and Economic Development, explained that South Africa is engaged in a process of an ambitious socio-economic transformation, and must be careful to stay open to foreign investment. Some protection is already provided by the Constitution. In 2010, an intra-governmental process to assess the risks of Bilateral Investment Treaties (BITs) was established, and saw no consequences from having or not having a BIT with a country. Many BITs are soon to expire, and must be reviewed to assess whether they aid in development. Cabinet has approved a new BIT template to ensure that there are compelling economic and political reasons for creating a new BIT.

South Africa, as a member of SADC, is still obligated to a problematic Financial Investment Protocol from 2006; SADC reviewed this in 2011 and produced a SADC model BIT template. It aims to better balance the rights of investors and states. This template should be adopted in August 2016.

The Promotion and Protection of Investment Bill was subjected to public consultation as well as NEDLAC and government consultation. Cabinet endorsed the Bill on 24 June 2015; state law advisors certified the Bill on 16 July and it was introduced to Parliament at the end of July. Public hearings will be held in September.

The Bill clarifies that fair treatment will be enforced so long as investments are “in like circumstances”. The Bill facilitates a dispute prevention approach, but investors will still have access to full legal rights; the Bill also accounts for state-to-state arbitration.

The Bill does not include Fair and Equitable Treatment (FET) because it places an undue burden on the State’s ability to regulate in the public interest. It does not include a Most Favoured Nation Treatment clause because the Government feels that all investors should be treated equally. It does not include a Full Protection and Security clause because, in the past, such clauses have been interpreted far too widely.

BITs along with international investment agreements (IIAs) are the most common vehicle for investment. BITs allow individuals to sue states and thus bypass domestic courts. This makes BITs problematic when pursued in conjunction with South Africa’s domestic goals. The current investment system has a highly fragmented dispute settlement system, a lack of transparency, and a lack of common standards of protection. The DTI felt that the system grants overbroad protection to foreign investors at the expense of host states. South Africa must protect its right to regulate in the public interest. The latest version of the Bill will be open to all stakeholders wishing to take part in the process.

Discussion
Mr Koornhof (ANC) asked if a lack of correlation between increased investment and BITs is common. Will other investment bills happen in other countries?

Mr Esterhuizen (IFP) noted that everyone agrees on the necessity of foreign investment. He hoped that public comment would raise issues about the Bill. He asked for clarity on the issue of BIT protections as detailed under the Provision for Security of Foreign Investment. He noted that foreign investors from countries such as the USA have no BIT protections. He said that foreign investors do have to comply with all local laws, such as measures for Black Empowerment. He observed that the Bill does more to protect government’s rights than investor’s rights. He said that South Africa could terminate BITs, which may lead to international challenges to the Bill. He noted the 60% decrease of international investment in 2004 as well as domestic South African issues has caused low business confidence in South Africa.

The Chairperson noted that no BITs have yet been cancelled. Will current BITs be replaced by the new legislation? How old are these various BITs? Do BITs that predate the constitution comply with it? What keeps Japanese and US investors here without BITs?

Ms Mlumbi-Peter replied that Investment bills are a new trend continentally: a number of countries are reviewing or beginning processes. Globally, a debate is happening between BITs and IIAs to try and minimise the risks of BITs. The World Bank has studied the correlation between BITs and investment. Other determinants outside of the existence of a BIT affect the decision to invest.

She agreed that South Africa needs more foreign direct investment (FDI), but that South Africa still must protect domestic investment. She explained that any protection introduced in the Bill will be on top of already adequate protection provided by the constitution. She agreed that investors must comply with domestic legislation. She agreed that government must solve the energy issue and other issues in order to encourage FDI. She explained that the BITs with some countries mentioned have merely expired; despite the fact that no BIT exists with Germany, Germany still heavily invests in South Africa.

South Africa does not intend to pursue old type BITs. The Cabinet has not concluded the template for future BITs, but the process will better compensate for national developmental interests. Even if BITs have expired, clauses still provide protection even after a BIT has been terminated. Some previous BITs do not comply with the Constitution; the issue of Expropriation is an example.

Dr Zhan gave the findings of a study on the correlation between investment treaties and FDI. He said that it is very difficult to quantify the impact of a treaty and that there are many different types of treaties based on international regions. Investment treaties are only one determinant also; economic and facilitation determinants also affect FDI. Over 50 countries are reviewing their investment practices to comply with the paradigm shift in international investment.

The Chairperson gave a ten minute break for tea then introduced the next speaker.

Tutwa Consulting briefing
Mr Azwimpheleli Langalanga from Tutwa Consulting explained that there actually is relatively little FDI regulation. Much of what there is dates back to the Second World War. The Havana Charter of 1948, in which South Africa was involved, aimed at liberalising trade and created the International Trade Organisation. The Charter attempted to balance the interests of developing and developed countries, and featured contrasting clauses supporting each. The Charter was eventually abandoned and investment has been poorly regulated.

The International Chamber of Commerce once drafted Pro FDI guidelines that were rejected by developing countries. Decolonisation resulted in a new international economic order that emphasised sovereignty and the rise of anti-FDI NGOs. Developing countries pushed for the created of what would eventually become the UNCTAD, which is more pro-developing countries. Around this time, the Berlin Wall fell and communism ended in Russia. The Nineties brought work towards Multilateral Agreement of Investment (MAI) led partially in secret by developed countries in exclusion of civil society, but developing countries were wary, especially after the Asian crisis, and negotiations were abandoned in 1998.

The MAI premised that FDI is good for development, supported a right of establishment and national treatment, and required many protections for FDI. Some performance requirements from the MAI would have conflicted with Black Empowerment.

The original UNCTAD (the UNCTC) would have excluded state-owned enterprises from the definition of an investor, allowed for renegotiation of contracts, and stipulated non-interference in domestic affairs. Other efforts to regulate FDI include the World Bank guidelines, the OECD draft code, and guidelines from UNCTAD and the ICC. After the failure of the Havana Charter, the WTO made efforts to make an investment regulatory body, but also failed. The WTO supports the principles of non-discrimination, national treatment, and most favoured nation.

South Africa is an original member of the GATT and signed onto the WTO as a founding member in 1995 as a developed country. South Africa is therefore a signatory to the GATS, TRIMs, and TRIPS. The current Bill is compliant with the General Agreement on Trade and Services (GATS) principle of most favoured nation. However, the Bill does run counter to the National Treatment concept of the GATS, although it might comply due to an exemption clause in the GATS if the definition of “public morals” from that clause is stretched. The Bill must account for Black Empowerment, but not unjustly discriminate. South Africa has the right, though complex and costly, to modify or withdraw from its GATS obligations.

Trade Related Investment Measures (TRIMs) aim to prevent performance requirements in countries. The Bill might contravene TRIMs policies because it aims to put obligations on foreign investments. Expropriation laws have to be removed due to international norms. However, South Africa has much diplomatic power with a seat in BRICS and the G20 as well as a voice representing Africa and thus may be able to create exceptions that help South Africa address the problems of its history.

University of Witwatersrand School of Law briefing
Prof Jonathan Klaaren from the University of Witwatersrand School of Law explained that he was part of the policy review six years ago and that the presentation focuses more regionally than bilaterally. He started off by saying that BITs probably do not help investment. Second, the government effectively pursues public policy objectives through the Bill. The Bill is one way to pursue these objectives; the other is the Brazilian policy of newly formatted BITs.

He thanked Ms Peter’s presentation for detailing the problems of old BITs and their lack of compliance with the current Constitution. He remarked that the current Bill complies with the Constitution.

Policy reasons for the shift away from BITs include constitutional guarantees for mitigation of risks for foreign investors, a need to reclaim policy space from BITs, BITs are unpredictable, the need to develop locally and the existence of empirical evidence supporting IIAs.

Brazil for a long time refused to sign BITs that included investor dispute settlement, but the new generation of BITs helped this issue. Now, BITs are also being set up between Brazil and many African countries.

Procedural fairness domestically can trump international fairness, it can be argued. This is South Africa’s argument to investors, and South Africa will also offer investors significant protection. Investors would want total perfect protection, but states have interests as well. In South Africa, foreign investors can have protection without a BIT due to SA’s robust and fair approach to domestic jurisdiction.

Mr Klaaren noted that trade negotiations are becoming more regional than bilateral. Both ISDS and FETs are involved in these negotiations. He explained how SADC policy has evolved to be more open to investment. Institutional Jurisdiction issues have arisen from this, for example the Mike Campbell case in Zimbabwe. Resolving such issues at the international level would lend legitimacy to the conclusions, but this issue ought to be discussed.

The Tripartite Free Trade Agreement will bring together 26 countries to promote trade, investment, and infrastructure development among other issues.

He noted a case between US and Canada (Clayton/Bilcon V Canada) about a construction project that ran afoul of Canadian environmental law. The company superseded Canadian judiciaries and went straight to North American Free Trade Agreement (NAFTA).

Jeremy Levitt has an article out saying that International Law has its origins in Africa to challenge Euro-centric views. Investors are currently interested in Africa. Africa is a participant in the global system, not just a recipient of investment.

University of the Western Cape Law Faculty briefing
Prof Riekie Wandrag from the University of the Western Cape Law Faculty came to present on regional issues of BITs and investment. The SADC FIP will be updated by August 2016. The presentation will compare the Bill to the SADC Model BIT and the SADC FIP, as well as considering the COMESA investment regime.

The SADC Foreign Investment Protocol aims to harmonise investment policies and create a favourable investment climate. The definition of investment, as the DDG mentioned, is an issue. The definition by SADC and the Bill of investor does not consider nationality and thus does not limit investment to the region. SADC has a wide definition of investment, but SADC may exclude a short-term portfolio investment. The Model BIT has three options for defining investment, which respectively widen in their inclusiveness. The widest third option is in most common in SADC BITs, whereas the narrowest option one is found in the Bill. Option one is enterprise-based.

Admission of FDI is uncontroversial between SADC and Bill. The Bill explicitly states that there is no right of establishment, but SADC also holds FDI accountable to domestic law.

BITs are the preeminent way to regulate FDI. BITs are the exception to the international norm that individuals must submit to national law wherever they are. SADC FIP does not allow expropriation for public purpose. The SADC Model BIT expands on this definition by further defining “fair and adequate compensation” in the event of the invocation of public purpose. This further definition is very similar to Article 25 of the South African Constitution. The Bill does not explicitly deal with expropriation, but complies with the Constitution. The Constitution may not account for indirect expropriation. The old SADC FIP is out of line here, but may be updated.

In relation to Investor Rights, the SADC FIP still supports Fair and Equitable Treatment (FET). The SADC Model BIT attempts to move away from conventional FET thinking: either FET must be invoked in situations of willful neglect of duty, or not have a FET but rather a Fair Administrative Treatment. The Bill has no FET clause. The Bill does account for National Treatment to give no favour to international investors, and thus goes further than both the SADC FIP and the Model BIT. However, the Bill has an exception for “domestic laws designed to regulate foreign ownership in specified sectors”.

No real conflict occurs on the issue of repatriation of profits between the three. Protection and security has been very contentious internationally. SADC FIP provides no safety and security clause; the Model BIT and the Bill provide very limited clauses based on available resources. International consensus holds that states need more policy space than old BITs provided. All three have measures to reserve the right to regulate for government, with the SADC FIP being the most limited. In general, the Bill gives wider rights to the state than the SADC FIP.

Dispute settlement is a source of conflict between the three. SADC FIP provides for international arbitration after six months of exhausting local remedies, with the default international body being UNCITRAL. In the SADC Model BIT, the party must prove that local remedies have been exhausted. The Model BIT strongly recommends the exclusion of an investor/state dispute settlement clause and prefers state-to-state, but does provide for all options. The Bill does not provide for investor/state dispute settlement. However, government may consent to international state/state arbitration. The Bill makes the state fight on behalf of its investors, but does not bind other states to defend its investors.

The TFTA aims to market the region as a single investment area. The COMESA only provides protection for intra-regional investment. It provides for FET and repatriation of profits. National Treatment policy is similar to the Bill. COMESA differs from South Africa on expropriation. COMESA falls in between the SADC FIP and the Bill on state right to regulate. COMESA allows for international forums to do dispute settlement, but does not allow appeal.

She reminded the Committee that the new SADC FIP will likely be more in line with the rest.

Discussion
Mr Esterhuizen commented that policies predating the 1994 constitution have little applicability beyond tariff issues. He called for the export of refined products. Where is an agreement with the WTO on VATs? He called for anti-dumping policies beyond poultry. He expressed concern that, if National Treatment is considered on a case-by-case basis, especially with relation to the like circumstances clause, it will lead to ambiguity in the law.

Mr Koornhof asked if both professors of law in attendance are comfortable with the law?

The Chairperson asked for clarity on the meaning of shared sovereignty. She also asked for clarity on Mr Langalanga’s comments about the danger of only focusing on domestic legislation and rather advocating for South Africa’s leadership on the continent as well as the concern expressed about the removal of state-to-state solutions. She asked Professor Wandrag for comment on whether FDI protection through IIA or the new BITs is preferable.

Mr Langalanga agreed that the current international system, especially the WTO, does not allow sufficiently for international economic relations for developing countries. The WTO is binding and allows virtually no leeway. He explained that the trend is away from national sovereignty to shared regional sovereignty, such as the TFTA. He reminded the Committee that the judicial system is very young in South Africa, and thus the ISDS helps ensure confidence in the area for investors.

Ms Wandrag responded to Mr Esterhuizen’s concern about like circumstances that she agreed that this clause is too vague. The Bill does not designate someone to decide on a complaint about National Treatment. All investments will have to comply with applicable laws. She said that she is much more comfortable with the Bill, but takes issue with state/state arbitration and the vagueness of the like circumstances clause. She also doubted whether the Bill would promote foreign investment. Most countries are revising both BITs and IIAs, so the international regulation of the Bill will evolve. She reminded the Committee that subjecting foreign investors to domestic laws is not a new concept.

Mr Klaaren said that he is fully confident in the constitutionality of the law. He agreed that the Bill needs to improve on the promotion and facilitation of foreign investment. However, while he said that he was comfortable, he urged the Committee to continue to improve the Bill.

The Chairperson thanked the presenters for the new information that will help the Committee finalise its view. She recognised the international shift and the contentious nature of these shifts in international investment practices. She asked the presenters for their opinion on the Bill’s ability to create an environment in which promotion of foreign investment would be possible.

Mr Klaaren thought that this Bill can be that platform, but that the Bill ought to be more explicit in its goals to be that platform.

Mr Langalanga agreed that it starts the conversation well, but that the Bill regulates too much.

Ms Wandrag agreed that the Bill is in line with modern trends and lauded the Bill’s setting of protections clearly before pursuing promotion.

Dr Zhan said that the Bill must consider protection, promotion, and openness. He said that the protection aspects are good and in line with trends. He said that the investment dispute settlement structure has pros and cons, but lauded the dispute prevention element. He said that promotion frameworks are commonly lacking internationally. Modernising promotion and openness might be a different stage. Other policies will also be necessary with the Bill in order to achieve the best outcome.

The Chairperson thanked all the presenters.

The meeting was adjourned.

 [Apologies: Ms Mantashe, Mr Mkongi, Mr Alberts, and Mr Hill-Lewis]