Promotion and Protection of Investment Bill [B18-2015] briefing

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Trade, Industry and Competition

01 September 2015
Chairperson: Ms J Fubbs (ANC)
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Meeting Summary

The Department of Trade and Industry gave a briefing on the Promotion and Protection of Investment Bill for both the Portfolio Committee and representatives from the NCOP’s Select Committee on Trade and International Relations. DTI explained that the international investment landscape is evolving and that the Promotion and Protection of Investment Bill is one example of many countries and international bodies pursuing legislation to keep up with these shifts. This Bill aims to replace the old system of Bilateral Investment Treaties (BITs) and protect South Africa’s right to regulate while keeping South Africa open to investment. DTI explained the process of developing the Bill before delving into the Bill’s specifics.

The Committee was taken clause-by-clause through the 14 clauses of the Bill. The definitions, especially that of ‘investment’, the interpretation, the purpose, and the application of the Bill were explained. The remainder of the Bill has provisions on issues such as right of establishment, national treatment, investment security, right to property, transfer of funds, government’s right to regulate, dispute resolution, the duties of the Minister, and transitional matters. DTI explained that foreign and domestic investment would be treated equally in ‘like circumstances’ and gave examples of these. After domestic dispute resolution mechanisms are exhausted, the government may consent to international state-to-state arbitration. DTI noted the creation of the Inter-Ministerial Council (IMC) to help coordinate all the relevant departments. Public hearings on the Bill would take place on 9, 15, and 16 September.

The Committee asked about government coordination in international negotiations, the Inter-Ministerial Council, dispute resolution, expropriation, the meaning of the phrases ‘material and significant’, ‘like circumstances’ and ‘no less favourably’ in the Bill, and the Bill’s relationship with SADC Protocols and the African Growth and Opportunity Act (AGOA). The Democratic Alliance expressed sharp concern at the ambiguity and ineffectiveness of the Bill.

In response, DTI emphasised that the Bill is designed to be in line with the Constitution. The Constitution allows local government to negotiate with foreign municipalities for investment purposes. The IMC includes the Department of Economic Development, Department of International Relations and Cooperation (DIRCO), National Treasury, DTI, and Department of Agriculture, Forestry and Fisheries (DAFF). Investors are free to pursue any avenue of domestic dispute resolution available to them before appealing for international state-to-state arbitration. The upcoming Expropriation Bill would address matters of expropriation. Examples for ‘material and significant’ and ‘like circumstances’ were provided. SADC would be reforming its investment policies by August 2016. The former Permanent Representative of South Africa to the WTO said that recent AGOA discussions had not made any reference to this Bill.

The Committee asked about preventing human rights abusers from investing, the prevalence of people making international agreements, the likelihood of the legislation deterring investors, government’s ability to deny investors state-to-state arbitration, the Minister’s powers with regard to investment, examples of situations requiring international arbitration. Members asked again about dispute settlement and how often reviews of international agreements take place.

The Department replied that multiple ministerial co-ordination was required for making agreements and referenced the creation of the IMC in order to consolidate work on investment. Clause 9 aims to be aligned with Section 25 of the Constitution. On the dispute settlement process, if, after exhausting the domestic legal system, investors may proposition the government for international arbitration. This process requires the consent of the SA government and the home state of the investor. Clause 13 of the Bill goes into much greater detail on the Minister’s powers. The process of creating the Bill was a review, but that reviews should occur regularly; DIRCO could answer further questions on this matter. Clause 12 of the Bill, with regards to dispute settlement, includes ambiguous language in order to allow for the use of all options and not push international arbitration.

On the transition period between BIT termination and the enactment of the Bill, state and parliamentary legal advisors explained that existing BITs would apply until the Bill came into effect. Already terminated BITs would rely on Sections 231 to 233 of the Constitution. The Chairperson noted the importance of this Bill and called for further work to remove ambiguity from the Bill. She asked for a written response from the legal advisors to further clarify their positions on specific language.

Meeting report

Opening Remarks
The Chairperson remarked that a fresh investment paradigm lies on the horizon. She noted that the NCOP Select Committee on Trade and International Relations was in attendance to prevent the Department from having to do two briefings.

Promotion and Protection of Investment Bill: briefing by Department of Trade and Industry (DTI)
Ms Xolelwa Mlumbi-Peter: DTI Acting Deputy Director General: International Trade and Economic Development Division, explained that there have been fundamental changes in the investment landscape with a new generation of investment policies. The Bill aimed to ensure policy coherence with broader development goals, with policies aimed to balance rights and obligations between the State and investors and fill gaps and inconsistencies in International Investment Agreement (IIA) coverage and dispute settlement matters. Many other bodies are pursuing similar legislation internationally.

Work on the Bill was started in 2009. The initial review produced a policy paper detailing the history of and a policy guideline for an approach to Bilateral Investment Treaties (BITs) for South Africa. In the past, BITs have tended to limit policy space and privilege narrow commercial interests. In addition, investors’ claims were able to bypass national courts and go directly to international arbitration. These BITs had ill-defined provisions and national treatment or compensation provisions conflicted with black empowerment policies and the Constitution.

Cabinet adopted this investment policy framework in July 2010 with the goal of keeping SA open to foreign investment with adequate security while preserving the sovereign right to regulate in the public interest and pursue developmental policy objectives. Five core measures will be considered:
- Development of a national Investment Act
- Only enter into BITs in the future on the basis of compelling economic or political reasons
- Development of a new BIT negotiating template
- Review and termination of BITs in force
- Establishment of an Inter-Ministerial Committee (IMC) on BITs and investment.

BIT termination has commenced with 13 terminations done indiscriminately thus far. The Promotion and Protection of Investment Bill was introduced to Parliament in July 2015. The Model BIT has been finalised. The IMC has met several times to consider the Bill and investment policy.

The objectives of the Bill are to keep SA open to investment, not impose new obligations on investors, not override existing domestic legislation or the Constitution, and clarify standards of protection for both domestic and foreign investors. The title of the Bill and the Preamble highlight the necessity of balancing state and investor interests as well as South Africa’s need to attract foreign investment.

Clause 1 of the Bill clarifies definitions used in the Bill.
Clause 2 defines investment as ‘enterprised based’ and emphasises that the investment must be in accordance with SA law.
Clause 3 on Interpretation, explains the Bill must be interpreted in accordance with its purpose, the Constitution, and international agreements and conventions.
Clause 4 gives the purpose of the Bill:
- Promote and protect investments
- Confirm protection of investments
- Sovereign right to regulate
- Confirm the Bill of Rights and laws applicable to investors.

Clause 5 clarifies the application of the Act.
Clause 6 states that there is no automatic right of establishment in South Africa.
Clause 7 deals with national treatment by granting investors the right to be treated no less favourably than SA investors so long as their investments are ‘in like circumstances’. The Bill gives many examples of ‘like circumstances’; these efforts were made to avoid challenges to, for example, domestic black empowerment laws.
Clause 8 deals with security of investment, and notes that SA protects foreign investors equally to domestic investors, subject to available resources and capacity. An example was given of a Swiss investor who had expected greater security for his game farm than Government was capable of providing.
Clause 9 states a right to property in terms of Clause 25 of the Constitution; expropriation issues have already been addressed by the Constitution.
Clause 10 addresses transfer of funds.
Clause 11 confirms the Government’s right to regulate in order to redress historical inequalities and many other public interests.
Clause 12 deals with dispute resolution. The Bill facilitates a dispute prevention approach, but retains full legal rights for an investor to pursue any avenue available under SA law. Providing that the investor has exhausted domestic remedies, the investor may pursue state-to-state international arbitration.
Clause 13 allows the Minister to make regulations.
Clause 14 details transitional arrangements and notes that the Bill will not interfere with protections provided by existing or terminated BITs.

The Bill was subject to rigorous consultation from government, stakeholders, from the public and NEDLAC, among others. Cabinet endorsed the Bill on 24 June 2015. The Office of the Chief State Law Adviser (OCSLA) certified the Bill on 16 July 2015 and it was introduced to Parliament at the end of July 2015. Public hearings will be conducted in September 2015.

Ms Mlumbi-Peter concluded by repeating the goals of the Bill. She explained that the Department has held workshops, published the goals of the Bill on the DTI website, and made media statements in order to engage with stakeholders. She explained the creation of the Inter-Ministerial Council (IMC) as an inter-departmental clearinghouse, in order to consolidate work on investment.

The Chairperson thanked the Department and called for questions, noting that some latitude for substantive comments would be allowed.

Mr B Mkongi (ANC) noted the importance of the Bill and called the Committee’s attention to the many uncoordinated investment agreements. What provision in the Bill sets out coordination among spheres of government so that the national government will lead? He noted that, frequently, provincial or municipal government officials sign agreements and claim to represent South Africa. Who is in the Inter-Ministerial Committee? Can you clarify the conflict-resolution regime? Are NEDLAC and other institutions involved?

Mr D Macpherson (DA) noted his long-running concerns with the Bill and said that neither promotion nor protection will happen with this Bill. He said that the Bill would fail to meet all of its key objectives. The Bill subjects investors to other pieces of legislation unduly. He noted that the Swiss game farm example was an extreme situation, and it should not provide the basis for legislation. What has been the feedback from specific foreign missions? On Clause 7, he said that investment regimes are changing, but that we cannot move radically from what the BITs stood for. BITs were so attractive because they protected investors from, for example, the Expropriation Act. He reprimanded the Department for leaving the issue of expropriation purposefully ill-defined and up to other departments.

Mr M Koornhof (ANC) noted that other countries are undergoing similar processes and that South Africa does not have BITs with all countries, notably the USA and Japan. He thought that the Bill created a fair investment framework. On the definition of 'investment', he asked for clarity on the phrase ‘material and significant'. On treating foreign investors ‘no less favourably’ he asked for further definition of 'like circumstances'. He also noted uncertainty about compensation and suggested bringing in the protocol of ‘fair and equitable treatment’ found for example in SADC.

Mr M Kolako (ANC) also asked about the relationship of the Bill to the SADC Protocol. He said that the Bill is in line with the Constitution. He called for the removal of ambiguities from the Bill. What comment has come from AGOA on the Bill?

The Chairperson asked for DTI to go into significant detail on the SADC issue. She asked for further explanation of the ‘like circumstances’ concept in relation to the Constitution, and noted that such terms can lead to issues. She noted that the legal counsel present could help with this matter.

Ms Xolelwa Mlumbi-Peter replied that the Bill does provide co-ordination to a degree, but admitted that the Constitution allows local government to negotiate for investment. The Bill aims to clarify protections in line with the Constitution. The IMC includes Economic Development, DIRCO, National Treasury, DTI, and DAFF. The Bill provides a framework for dispute resolution. The first avenue is government mediation; the second is the South African legal system. Investors can pursue any remedy for disputes.

In response to Mr Macpherson, she felt that the Department had successfully clarified the protections provided by the Bill and that the Bill is aligned with the Constitution. As for the Swiss case, the 2010 review found this risk and others worthy of provisions in the Bill. She felt that the Bill has not significantly departed from the old BITs, but rather made the framework more compatible with the Constitution. The Bill does not include provisions that have been problematic in the past, such as ‘fair and equitable treatment’ but to the extent possible, old provisions have been included. The right to property in Clause 9 is in line with the Constitution. Expropriation will be dealt with in the Expropriation Bill. The Department has consulted the EU, EU-SA business links, the American Chamber of Commerce, and all the embassies of countries with terminated BITs with South Africa. We have explained the rationale for the termination of BITs, and now Germany is learning from our process of addressing, for example, issues with investor-state dispute settlement. She recognised that perhaps these old BITs were terminated too quickly, but said that after time has passed, people have gotten on board.

Ms Xolelwa Mlumbi-Peter explained the language of ‘material and significant’ to mean that there must be a physical presence of investment with significant economic value; this aims to not cover speculative investments. With ‘like circumstances’, Clause 7 gives many examples, but will need to be clarified on a case-by-case basis due to the impossibility of an exhaustive list of examples. If an investor challenges the incentivisation of black industrialists, the Court will have to consider many factors before making a decision such as the purpose of the legislation. She agreed that there is misalignment between SADC provisions and the Bill, but SADC is currently working to review its Financial Investment Protocol (FIP). These changes will likely be in place by August 2016 to remedy this realignment. Issues considered by SADC will include ‘fair and equitable treatment’ and ‘national treatment’. She deferred the question raised about the African Growth and Opportunity Act (AGOA) to Ambassador Ismail.

Ambassador Faizel Ismail, former Ambassador Permanent Representative of South Africa to the WTO, said that the issue of AGOA has not come up as an issue of contention in any discussions. He explained that he met with Vice President of the US Chamber of Commerce, Scott Eisner, a month ago and the topic was not a matter of contention. Last week, Minister Rob Davies met with his counterpart, US Ambassador Michael Froman, in Gabon to review AGOA; and the Promotion and Protection of Investment Bill was not a matter of contention then either.

Mr E Makue (ANC, Gauteng) noted that a major injustice in the realm of investment occurs when the investor does not have a good human rights or worker treatment record. How does the Bill deal with this sort of investor? How does the Bill affect people or corporations investing outside of South Africa? What happens if these corporations investing outside of South Africa do not have a good record back home in South Africa?

Mr Mkongi asked the Department to consider the issue of too many different people going around and making international agreements on behalf of South Africa. How will the Bill address this?

Mr Macpherson referenced Clause 9 and said that investors will deal with laws that are applicable at the time. Mr Macpherson listed all the draft legislation on the table currently and suggested that these contentious bills will turn investors away. He said that investors are playing a ‘wait and see’ game and the outcome would be extremely problematic. As for Clause 12, he asked why the government would concede to international arbitration if it has the right as under Clause 12 to settle the matter nationally? He gave an example of when the Expropriation Bill becomes law; why would the government invite international critique of its domestic policies. He said that Clause 13 gives the Minister powers that are far too vague and broad, which will turn off investors. He quoted the Memorandum on the Objects of the Bill and pointed out that regulations must be clearly stated so businesses can predict the future as best as possible; otherwise, investors have little security.

Mr Makue asked again about the SADC Protocol. He then gave an example of an international mining company degrading human rights and the SA government having to go through international arbitration. However, the same company might treat South Africa more favourably than it does Botswana but this would be using double standards; this situation would also require international arbitration. Neither of these situations could have national arbitration; is this the rationale of Clause 9? He noted that the Minister has a responsibility first to the people of South Africa, and he must have the right to fix issues in the public interest.

The Chairperson said that we must not create a situation of ‘everyone for himself’ but neither must we create a situation where discrimination and favour is too prevalent. However, South Africa must uphold its Constitution and discriminate to a degree in order to address inequality. South Africa must respect another nation’s sovereignty, but she noted that international agreements always degrade this to a degree. She noted that businesses would know the Constitution and applicable legislation, which provide certainty. We must develop robust legislation, and there is a need to unpack some of the language of the Bill. However, we must agree that we all have a common Constitution.

Ms Xolelwa Mlumbi-Peter said that Bill only covers investment made in SA, not outside of SA. In terms of outside investment, most of South African foreign direct investment (FDI) goes to the African continent or to BRICS. The SADC FIP is being reviewed. We are also working towards eventually having a Continental Free Trade Agreement to ensure a future framework for investment. Beyond the continent, companies rarely raise BITs as a sole determinant of investment. The World Bank has international investment agreements, and investors can make agreements with specific countries. South Africa has many investors with whom we do not have BITs. Even though we terminated our BIT with Germany, the Germans will invest here heavily.

The Department noted the issue of co-ordination and referenced the creation of the IMC in order to consolidate work on investment. For issues with Clause 9, Ms Xolelwa Mlumbi-Peter said that the section aims to be aligned with Clause 25 of the Constitution. As for Clause 12, the Bill takes strides to preserve every avenue of dispute resolution available to investors. If, after following the domestic legal system, investors may proposition the government for international arbitration. This process requires the consent of the SA government and the home state of the investor. This process allows for objective consideration of the issue. As for Clause 13, the section details how a mediator is appointed and what processes need to be followed in dispute regulation. Such regulations would follow the passage of the Bill. The Department welcomed the oversight of the Committee.

Mr Mkongi noted that many international agreements are obsolete, and asked how often these agreements are reviewed? How many do we have?

Mr Macpherson returned to Clause 12 and quoted the DDG as saying the government can ‘consider’ allowing cases going to international arbitration. If the government has acted in bad faith, why would government allow international arbitration? This language is a source of confusion for investors.

The Chairperson noted that reviews do not happen very often; for example, it took ten years to review gambling legislation. She said that, in the fast-changing international climate, reviews would have to take place often. Where is the call for regular review in the Bill? She noted that municipalities sign agreements between municipalities, not with other countries.

Mr Mkongi gave an example of bus drivers from Spain working in the Northern Cape as an issue of municipalities signing agreements that are a cause for concern.

Ms Xolelwa Mlumbi-Peter gave the 2009 review as an example of a review taking place, but agreed that reviews must take place regularly. She agreed with the Chairperson that not all agreements are the same, and that DIRCO would have a better sense of the implications of all the various types of agreements in play here from different spheres of government. She conceded that the Bill’s language includes ‘may’ in Clause 12. This accounts for the situation in which issues are resolved without international arbitration, which is what the Bill wants to see happen. The Bill wants to keep all options open.

The Chairperson noted that most aspects of the Bill have come up several times. The Chairperson called for consideration on the appointment of mediators. She also called for discussion on the language regarding the transition phase. What does ‘general South African law’ mean for the coverage in the time between termination of a BIT and the Bill’s enactment.

Ms Suraya Williams, Principal State Law Advisor, said that existing BITs would apply until the Bill is enacted. If a BIT has been terminated, the Constitution and all the rights therewith as well as other legislation would be applicable. She noted that the Expropriation Bill would be the authority on the issue of expropriation; otherwise duplication would lead to confusion. She referenced Clause 231 of the Constitution as giving the power for making international agreements to the Executive. Basically, the Constitution already regulates these agreements and governs these when they are binding. Concerning 'like circumstances', the terminology is taken from BITs and the WTO in order to continue international precedence. She agreed that these issues must be considered case-by-case. 'Like circumstances' should not be construed to mean exactly the same.

Ms Phumelele Ngema, Parliamentary Legal Advisor, agreed that Clauses 231 to 233 of the Constitution sets the tone for how the state of South Africa should conduct itself in the international arena as a sovereign entity. Many case judgments from the judiciary have ironed out exactly how the South African government should interact with other nations, such as Kaunda v President of the RSA. She agreed that the Bill is in line with the Constitution.

Mr Makue responded to Mr Mkongi that DIRCO has reported to the NCOP on the municipality matter. DIRCO always must advise municipalities on this matter through the applicable ambassador. He said that he would take the matter up with DIRCO the following day.

On how to move forward on the Bill, the Chairperson commented that she had found the workshop helpful and called for further clarity on definitions, for example the definition of 'investment'. She also called for a closer look at Clause 3 on the interpretation of the Bill, because the interpretation clause would be very important. She noted that international law, regional relationships, and the sovereignty of foreign nations are all in play here. She asked for a write-up of the statements from the legal advisors on transition issues. She noted that dispute resolution and property have come up heavily in discussion; she asked for clarity on the property clause, Clause 25, of the Constitution. She asked for the write-up to refer to equity, practicability, the need to address the aftermath of past discriminatory laws and practices, and the right of establishment.

Committee Business
The Committee considered its programme. On 2 September, the agenda was National Regulator for Compulsory Specifications' Letters of Authority effectiveness: hearing; SPII & THRIP: Innovation & Capacity Building DTI interventions.

The Chairperson noted that she would leave the 2 September meeting for an hour, but that she would open the meeting. The Auditor General would present from 8:30-10am for the management Committee only.

Mr Macpherson asked for clarity about only the management Committee meeting with the Auditor-General .

The Chairperson responded that the Committee as a whole will meet the Auditor-General on 8 September.

Mr Macpherson asked for the minutes from the 2 September meeting, and the Chairperson assured him that any substantive information would be made available.

The Chairperson said the Minister will present the DTI’s annual report on 8 September. The report will be tabled on 4 September.

Mr Mkongi asked how much time will MPs be given to peruse other documents?

The Chairperson said that the DTI would table everything well before their end of the month deadline.

The Committee adopted the minutes from the 4 and 7 August meetings.

The Chairperson was absent for the 5 August meeting, and thus she asked for these to be considered later.

The meeting was adjourned.

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

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