Promotion and Protection of Investment Bill [B18-2015]: public hearings

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Trade and Industry

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

In its submission on the Promotion and Protection of Investment Bill, the American Chamber of Commerce in South Africa (AmCham), which represents some 600 US companies operating in SA, called for the inclusion of a ‘fair and equitable treatment’ clause. It expressed concern about the Private Security Industry Regulation Amendment (PSIRA) Bill and the Expropriation Bill, especially the use of language such as ‘subject to available resources and capacities’. When pressed during questioning, AmCham called the Promotion and Protection of Investment Bill ‘a nail in the coffin’ for US foreign direct investment (FDI) in SA.

Second to present was Anglo American South Africa, the major mining conglomerate. Anglo American was careful to note its long history in SA and its efforts to support government and sustainable development. It noted unclear and unfair dispute settlement mechanisms and the lack of ‘fair and equitable treatment’ as its major issues with the Bill. In addition, Anglo American was concerned that the PPIB would be unconstitutional since it does not comply with the current SADC Finance and Investment Protocol (FIP). Anglo American generally supported the characteristics of the old bilateral investment treaties (BITs). Questioning revealed that, while the company supported government, it was very concerned about the burden that the current slew of legislation in Parliament would place on business. In addition, Anglo American resented the lack of consultation when old BITs, such as the UK BIT, were terminated.

Third to present was the South African Institute for Race Relations (IRR) which advocated for a wider definition of investment, a ‘fair and equitable treatment’ clause, a more specific definition of ‘like circumstances’, and the removal of the ‘available resources and capacity’ language. IRR pointed out that sustainable development and black empowerment cannot take place without a strong economy, and that the economy depends heavily on FDI. IRR called for the withdrawal of the current PPIB in favour of drafting a new bill. Questioning concluded that the PPIB cannot be withdrawn at this point, but that Parliament can redraft or reject the Bill. The IRR expanded on its points regarding international arbitration and expropriation.

Fourth to present was the Banking Association of South Africa (BASA) which proposed many changes to definitions in the Bill to align it with existing norms and legislation. BASA proposed the removal of the phrase ‘subject to available resources and capacity’ when discussing investor security. During questioning on government’s ability to decline to participate in dispute settlement, BASA called for a clear process for dispute settlement. BASA did not think that this Bill in particular will cause a downgrade in investor confidence, but this Bill does contribute to a pattern of regulation that makes investment difficult. Questioning also led to an argument on the competence of state legal advisors in certifying the PPIB and other bills.

Last to present was the EU Chamber of Commerce and Industry in South Africa, who had already presented but was invited back due to the extensive nature of its comments. The EU Chamber echoed similar concerns from its earlier submission about the need for tighter definitions, dispute settlement improvement, fair and equitable treatment, and issues with expropriation. Most companies from the EU are waiting to see how this and other pieces of legislation go before pursuing any further investment in SA. Questioning revealed that the EU Chamber hoped to reform the current Bill to reverse the perception that foreign investment would be treated less favourably; this perception has already caused two training centres to be pulled from SA.

At the end of the meeting, the DTI was called on to table the proposed amendments to the SADC FIP.

Meeting report

American Chamber of Commerce in South Africa (AmCham) submission
Ms Carol O’Brien: AmCham Executive Director, detailed US companies’ activities against apartheid during the 1980s. She explained that, in the 1980s, US companies were the only companies employing black people; these practices were a precursor for BBBEE. The US has also invested heavily to combat HIV and TB in South Africa through PEPFAR. The African Growth and Opportunity Act (AGOA) has provided duty free trade access to the US market for South Africans; AGOA has significantly helped the SA auto industry. AGOA is set to be renewed.

There are currently 600 US companies in SA. In 2014, AmCham surveyed 89 of these companies and found that they contributed R278 billion and employed 220 000 people. Ms O’Brien detailed the countries such as Kenya and Mauritius that are competitive for US foreign direct investment (FDI).

The main issue of the submission is ‘fair and equitable treatment’. Ms O’Brien reminded the Committee that the US never had a bilateral investment treaty with SA because it was never necessary. Though AmCham recognises the government’s right to regulate, 'fair and equitable treatment' protects against: arbitrariness of decision-making, abuse and coercion in decision-making, and denial of justice when decisions are made.

Ms O’Brien gave the Private Security Industry Regulatory Amendment (PSIRA) Bill as an example of the danger of the over-reaching powers of SA government. Clause 20 of the PSIRA requires 51% of international companies are transferred to South Africans. If the PSIRA Bill is promulgated, the Minister would have unchecked power over dispute regulation. In Section 8, the PSIRA Bill states that ‘The Republic… must provide security subject to available resources and capacity’. This section as well as the similar section of the PPIB is problematic.

These security issues combined with expropriation issues have caused investor confidence in South Africa to plummet. The US is already seeing major companies pull out of South Africa. Investors cannot expect compensation that is ‘fair’ from the current Bill. Neither ‘fair and equitable treatment’ nor ‘promotion of investment’ are evident in the PPIB.

Discussion
The Chairperson asked for clarification on the PSIRA Bill. She noted that the PPIB is in line with the RSA Constitution, which the US investors clearly approve of, and asked where the lack of ‘fair and equitable treatment’ is.

Ms O’Brien explained that the problem with the PSIRA Bill is that it requires companies to be controlled by and made up of South Africans, thus excluding US businesspeople. She noted that the phrase ‘subject to available resources’ is discomforting for investors.

Mr G Hill-Lewis (DA) asked what the US investor response would be if the PPIB was passed in its current form? Does the Bill successfully promote and protect investment?

Mr A Williams (ANC) asked if foreigners control private security companies in the USA. He said that such a situation could create national security issues.

Mr M Kolako (ANC) asked if US companies feel that the PPIB is not necessary? What must be done about this issue

Ms O’Brien explained that US companies feel that they cannot be competitive in SA; she noted that investment in SA is not a major part of these companies’ profits. She called the PPIB a ‘nail in the coffin’ for US FDI. She agreed that it is necessary to regulate in the public interest. The US has no specific legislation requiring private security companies to be run by US citizens. She asked why South Africans would rise up against fellow South Africans. She saw no problem with using US expertise. She explained that BITs were a source of comfort; something is necessary to ensure investor confidence.

The Chairperson explained that the executive will carefully check the PSIRA Bill against the Constitution. She noted that ‘membership’ and ‘ownership’ are very different within the PSIRA Bill and that security is a major issue in all countries. She admitted that the concept of ‘fairness’ for investment is a serious issue on which to deliberate. She thanked AmCham for its concise submission. She thought that the expropriation issue was an unfounded fear of what might happen, much like the reasoning for Caesar’s assassination. She welcomed input in the future from the AmCham.

Anglo American South Africa submission
Mr Andile Sangqu: Executive Head of Anglo American South Africa, called for the PPIB to foster investor-state trust and transparency and to modernise in light of SADC, BRICS, and UNCTAD practices. He noted dispute settlement and ‘fair and equitable treatment’ as major issues.

Anglo American is a diversified global mining company that has been in South Africa since 1917. There is a need to improve SA’s competitiveness for foreign investment. 18% of SA’s GDP comes directly or indirectly from mining. Though the mining industry has been struggling recently, the industry still continues to heavily invest in public infrastructure; for example, R5 billion has been spent to improve employee housing. The mining industry felt that it was its patriotic duty to criticise the PPIB.

Mr Kevin Lester, Head of Group Legal: of Anglo American South Africa, referred to the creation of many bilateral investment treaties (BITs) after 1994. These BITs typically included language on ‘fair and equitable treatment’ and ‘most favoured nation’ among other investor protections. The SADC Finance and Investment Protocol (FIP) and the SADC Model BIT both include these typical BIT protections. The SADC Model BIT was settled in July 2012. After this, South Africa set out to unilaterally terminate 13 BITs with EU trading partners; this action sent a negative message to the international community. These terminations took place without necessary government oversight or investor consultation. Anglo American South Africa called for the PPIB to be re-worked to reflect the SADC Model BIT and renew trade relationships with former EU BIT countries.

Mr Lester explained that South Africa is constitutionally bound to comply with the SADC FIP, which includes ‘fair and equitable treatment’ language. He noted that the Constitution does not provide the same level of protection to foreign investors as it does to domestic investors. Anglo American commended the PPIB’s efforts to make foreign investors comply with domestic transformation and development policies.

Mr Lester explained that the SADC FIP is being reviewed; the PPIB should align with the new FIP when it is released. He noted that Mauritius is the most popular SADC destination for investment. Within BRICS, the trend is toward greater investment protections. Though Brazil has not historically had BITs, it is aggressively pursuing international trade. China is concluding agreements with Australia; Australia is a major commodity competitor with SA. UNCTAD applauded updating investment policy but observed that terminating old BITs is not the international trend.

Mr Sangqu called for protecting investors in order to fund sustainable development. He urged the Committee to redesign the PPIB to align with SADC and international trends.

Discussion
The Chairperson asked for the 2015 employment numbers for Anglo-American. She asked for a comparison of figures from, for example, 2009 and 2010 in order to understand the impact of the recession. She noted that the old BITs were simply not renewed; they were not terminated and thus the protections stayed in place. Were any BITs terminated?

Mr Hill-Lewis noted the importance of Anglo American to the South African economy. What will the impact on Anglo American investment in SA be if the PPIB is passed in its current form? He asked whether study on the PPIB’s alignment with international agreements has been conducted.

Mr Williams noted that any action to promote the people’s interest has historically caused business uncertainty. Is the Constitution not protection enough?

Mr Kolako asked whether Anglo American was consulted when the BITs were terminated and when the PPIB was being developed? Is the international trend towards making BITs?

Mr D Macpherson (DA) noted that the PPIB combined with other legislation like the Expropriation Bill could be devastating for Anglo American. He explained the necessity of businesses being able to know how all legislation would affect business. He asked Anglo American to comment on the impact of legislation across the board.

Mr Sangqu agreed to compile the information the Chairperson requested and send it through. Anglo American resented the notion of constant business uncertainty and explained that Anglo American is here to work alongside government to promote confidence. He agreed that a holistic approach to all legislation affecting the investment environment is necessary. He cautioned that all this legislation could be contradicting or at least overly burdensome for business. He suggested that government have one department handle all this similar legislation rather than many.

Mr Lester explained that each investor would consider each factor for or against investment. Each additional negative factor such as those noted in the PPIB makes investment less likely. He admitted that non-renewal is different than termination, but held that the effect is the same. The sunset provision does not protect new investment. At no stage was Anglo American consulted by government on how to sell or frame foreign investment. There was also no consultation or media coverage on the non-renewal of the UK BIT. He noted that the DTI’s statement at the time was that it would only review BITs, not decide to not renew them.

The Chairperson called for suggestions for improvement from Anglo American. She recalled that the state legal advisor also called for a review of ‘fair and equitable treatment’ and ‘expropriation’. She reminded the Committee that the Expropriations Bill does not allow for arbitrary expropriation and obligates government to negotiate.

DTI Acting Deputy Director General: International Trade and Economic Development Division, explained that some controversial aspects of the SADC FIP have been removed in order to better align it with international trends. This update should be ready for review by the end of the year.

South African Institute of Race Relations (IRR) submission 
Dr Anthea Jeffery from the IRR advocated for a wider definition of investment, a ‘fair and equitable treatment’ clause, a more specific definition of ‘like circumstances’, and the removal of ‘available resources and capacity’ language. The discount factors in relation to expropriation from Section 25 of the Constitution is problematic. The dependence of repatriation on ‘applicable legislation’ creates investor uncertainty. She called for investors to be able to participate directly in dispute settlement. She felt that a 'fair and equitable treatment' clause would be in line with the Constitution.

Dr Jeffery expressed concern that, because the PPIB is so vague, it will be unable to redress historic inequality. She pointed to the Mineral and Petroleum Resources Development Act (MPRDA), as contributing to the mining industry’s woes, as an example of the consequences of vague legislation. She felt that many factors undermine Section 25 of the Constitution, such as the Expropriation Bill, PSIRA Amendment Bill, the MPRDA and its Amendment Bill, and 51% BEE ownership requirements. These factors all give government powers to directly or indirectly acquire property with limited to no opportunity for citizens to challenge.

The PPIB should expand the definition of investment to cover ‘every kind of asset. The PPIB should prohibit direct and indirect expropriation unless a court has confirmed the constitutionality of the proposal. The PPIB should provide compensation based on maker value, less discount factors, plus damages for all direct losses resulting from expropriation. The PPIB should include a clause on ‘fair and equitable treatment’. The PPIB should give investors the right to international arbitration and guarantee repatriation of capital and returns. The PPIB should remove provisions on ‘like treatment’ and ‘available resources’. The PPIB needs to better align with Section 25 of the Constitution. In reality, the PPIB should be withdrawn and redrafted.

In order to redress historical inequalities, South Africa’s economy must grow; redistribution is not enough. Though many jobs have been added since 1994, the population has also grown significantly. GDP per person has shrunk worryingly. The NDP urges 30% of GDP in fixed investment; the rate as of 2014 was at 20%. In order to improve the GDP and fix the budget deficit, the only path forward is foreign investment. The cumulative value of FDI in SA is now R1,6 trillion, 85% of which comes from the West. SA cannot afford to alienate the West. The termination of BITs with Europe severely undermined confidence for future investment. The PPIB simply does not codify clauses from previous BITs.

Dr Jeffery called for a new PPIB to better align with the Constitution, old BITs, and the SADC FIP. In order to improve the country, foreign investment is absolutely necessary.

Discussion
Mr Hill-Lewis asked whether the Executive has the power to withdraw a Bill that has been tabled in Parliament?

The Chairperson explained that this Bill is in Parliament, and thus Parliament can either reject or redraft the PPIB.

Mr Hill-Lewis said that it seems the Executive cannot withdraw the PPIB, but it can be redrafted or rejected. What is Dr Jeffrey's impression of the impact of the PPIB on foreign investment if it is passed in its current form?

Mr Macpherson asked if the PPIB is unconstitutional. How is it unconstitutional? Do you think that government would choose to accept international arbitration that would criticise government’s laws? He noted that the DTI failed to sufficiently answer this question in the past.

Mr Hill-Lewis noted Dr Jeffery's issues with the definition of expropriation from the 2015 Expropriation Bill; he asked her to summarise that opinion. He noted, with the definition of investment, that intellectual property is important to protect. Would her proposed definition change protection of  intellectual property?

The Chairperson asked, in Dr Jeffery’s proposed expropriation definition, whether the obligation would be on the state. Which part of the Constitution calls for property to be compensated with market value plus damages?As for fair and equitable treatment, the US and other countries account for this but also provide for consultation. How do you feel about the possibility for consultation of people’s reaction to proposed expropriation?

Dr Jeffery called for the Committee to recommend rejection of the PPIB. She was displeased with the very short time allowed for public hearings. The IRR has noted extreme concern from international investors; many of these investors are taking their money out of South Africa. She pointed to Section 2 of the Constitution explaining the ‘rule of law’. Arbitrary or vague provisions undermine the rule of law and thus are unconstitutional, such as ‘like circumstances’ and ‘available resources’. The requirement of government’s consent for international arbitration also undermines the ‘rule of law’. She agreed that there is no guarantee of government’s consent and that government would be reluctant in many situations.

Dr Jeffery explained that she has campaigned in the past to change the different versions of the Expropriation Bill. Language in the previous Bill would have even prevented courts from reviewing cases. The current Expropriation Bill details an initial process of negotiations, followed by inspections, followed by a notice of expropriation with or without the landowner’s consent. If the original landholders do not accept the compensation of 70% of market value, the landholder has a mere 60 days to sue. This places the obligation on the citizen, not the state; this is wrong. The state should have to prove in court that the interest of the landowner is upheld before expropriation takes place. Section 25 of the Constitution details four discount factors, all of which should be considered.

The Chairperson called for a response in writing to these complex constitutional issues.

Mr Macpherson noted that his province is largely tribal land. What happens if there is an expropriation claim on tribal land with a business operating on it?

The Chairperson welcomed a contingency from the South African Defence Force in attendance.

Banking Association of South Africa (BASA) submission
Mr Cas Coovadia, BASA Managing Director, explained that BASA has considered the PPIB in the context of SA’s issues and its need for inclusive growth and foreign investment. BASA has also considered the PPIB in the context of AGOA. BASA’s view is that the PPIB should align better with the previous BITs.

BASA proposed many changes to definitions in the PPIB, including ‘dispute’, ‘juristic person’, and the change of ‘enterprise’ to ‘entity’. The word ‘resources’ in the definition of 'investment' needs to be clarified. ‘shares, debentures, or other ownership instruments’ needs to be changed to ‘securities’ to align with the Companies Act.

BASA proposed the removal of ‘subject to available resources and capacity’ when discussing investor security. The PPIB should guarantee compensation for property at market value. Transfer of funds language needs to be more certain and thus similar to the old BITs. The wording from Section 12 on disputes ‘provided that a dispute will only arise once the parties agree or as prescribed by law’ should be deleted. In addition, the dispute section should allow for international arbitration even if domestic remedies have not been exhausted.

These amendments should help to attract FDI to South Africa. In order to compensate for internal issues, South Africa cannot afford a downgrade or even the perception of a negative investment climate.

Discussion
The Chairperson noted BASA’s reference to the government’s need to consent to arbitration. She asked Mr Coovadia to give an example of a different mechanism internationally.

Mr Coovadia explained that there needs to be agreement from both parties and a clear process for settlement. He could not think of a specific party.

Mr Macpherson agreed that dispute settlement must include two parties, but he still disapproved of the government’s ability to decline to participate in dispute settlement? Will the legislation itself or the effect of the legislation cause the downgrade of confidence BASA mentioned?

The Chairperson noted BASA’s issue with the language on ‘shares, debentures, or other ownership instruments’ and called for comment from the Director General and Mr Coovadia.

Mr Coovadia does not feel that this Bill in particular will cause a downgrade, but this Bill does contribute to a pattern of regulation that makes investment difficult. Business is fickle; they pursue the places with the most profits and least regulation. Regulation is necessary, but this Bill combined with other bills under consideration send the wrong message. He called for the PPIB to align to the Companies Act on securities.

The Chairperson called for a balance of obligations to investors and to the state.

Mr Lionel October: DTI Director General, noted that, before a Bill comes to the Committee, it is checked thoroughly by the state law advisors for compliance with domestic and international law.

The state legal advisor explained that the DTI has received submissions about aligning the Bill with the Companies Act already. These matters are being pursued and these will be integrated into the PPIB.

Mr Macpherson noted that many bills that the state law advisors have approved have been challenged successfully in the Constitutional Court. He felt that issues identified by the state law advisors should be released as soon as possible.

Mr Alberts (FF+) asked why we are not simply reworking the previous BITs, which were effective?

Mr Hill-Lewis asked why so many issues arise in public hearings if the state law advisors did such a good job? For example, the issue with non-compliance with the Companies Act and non-compliance with the SADC FIP. The Committee cannot consider a Bill that contradicts the FIP on the promise the FIP will be updated. Can the Committee see the proposed amendments to the SADC FIP?

The Chairperson noted that not everyone agrees on the interpretation of the Constitution. She reminded the Committee that the Department is scheduled to present the next day.

Mr Kolako welcomed the advice from outside parties in order to help the DTI and the Committee. He called for engagement with the Department on the issues raised during these hearings.

European Chamber of Commerce in South Africa submission
Mr Stefan Sakoschek: Chairman of the EU Chamber explained that the EU has R460 billion of annual trade with SA. However, the environment for investment is gradually deterring investment more and more. The EU has a long-term investment strategy in SA, but investment cycles are short and can be detrimental worldwide. The PPIB seems to pursue short-term investors, which does not make the EU happy.

The PPIB does not provide adequate protection or promotion. The PPIB needs to have far clearer and transparent investment rules. Mr Sakoschek proposed new definitions of ‘measure’ and ‘investment’. The PPIB should remove ‘subject to national legislation’ from the national treatment section. The PPIB should add back the terms ‘and returns’ and ‘equal’ to section eight on investment security. The PPIB should include ‘full market value’ guarantees in regard to expropriation. The right to regulate and dispute settlement need far more specific wording and should revert back to the original version of the PPIB. The Minister’s powers to regulate should be subject to specific rules and procedures. Transitional arrangements are not sufficient to provide the protection necessary to motivate investors. In conclusion, SA is nowhere near the top of the list for FDI; after all, these businesses want to turn a profit.

Mr Sakoschek included answers to questions raised the previous week. Mr Sakoschek explained that the current PPIB does not achieve a balance between investor and state interests. As for the impact on EU investment, some firms are already reconsidering investment. Most are waiting to see the impact of this and other bills. Investors actually often have their own impact on credit ratings. This EU Chamber is the only one in Sub Saharan Africa, though there are other Chambers internationally. Although this Chamber is currently national, it is looking to expand regionally. The EU Chamber has strived to promote inclusive growth through job creation, supply chain development and increased capacity. This development benefits SA and foreign investors. Mr Sakoschek spoke about the prevalence of sub-standard goods in the marketplace as a threat to EU investment and admitted that both China and SA are working to combat this. Sub standard goods motivate companies to manufacture locally, which helps inclusive growth. The EU Chamber asked for further clarity on protections for ‘minority’ or ‘speculative’ shareholders. These submissions come from extensive consultations with various stakeholders and chambers.

Discussion
The Chairperson called Mr Sakoschek’s answers to the questions very constructive. She called for comment.

Mr Alberts asked what the EU Chamber’s ideal Bill would look like. What would bring your investors the greatest level of confidence?

Mr Hill-Lewis confirmed that the UK is a part of this EU Chamber and asked for clarity on the issue of national treatment.

Mr Macpherson asked if the EU Chamber agreed with the US Chamber’s metaphor of the PPIB being a ‘nail in the coffin’ for FDI. Have any EU companies already withdrawn?

Mr Sakoschek explained that his organisation has worked on the PPIB since its inception and said that the EU is going to work with the PPIB; scrapping the PPIB would hurt the EU. The EU Chamber would have welcomed submissions from other BRICS countries. Mr Sakoschek still felt that international investment would receive less favourable treatment in many situations. He expressed concern that many regulations are being created behind closed doors. The EU Chamber does not view the PPIB as a death nail, but rather as creating a question mark. However, if it is not profitable to invest in SA for whatever combination of reasons, then businesses will disinvest. No businesses have yet been removed to Mr Sakoschek’s knowledge, but two training centres have been removed.

The Chairperson asked what in the PPIB does not support sustainable development and inclusive growth, considering the fact that the EU Chamber seems to support both goals?

Mr Sakoschek said that he would consult his members and reply in writing.

The Chairperson reminded the Committee that the DTI will help deliberate on protections in the PPIB in tomorrow’s meeting. She said that this Committee has never railroaded a Bill and will not do so now. She called for further research into the options for withdrawing bills. She agreed that the state law advisors have made mistakes in the past, but, by and large, they help.

Mr Hill-Lewis called for Ms Mlumbi-Peter to table the amendments to the SADC FIP. He also called for a submission from Chambers of Commerce from India and China.

Remote Gambling Bill [PMB3-2015] 

 Mr Hill-Lewis noted that his Private Member’s Bill has been referred to a subcommittee that aims to deal with gambling issues. This subcommittee, of Mr Hill-Lewis, Mr Mkongi, and Mr Williams, has not yet convened. If the subcommittee is not willing to take the Bill seriously, the full Committee should consider it. He did not want the matter to spill into 2016.

The Chairperson requested that policy information be provided from the DTI.

The Director General explained that the Private Member’s Bill has received significant public comment and that the DTI is trying to schedule a date for consultation with the Gambling Council.

The Chairperson said that the Committee cannot indefinitely keep this Bill on hold. She asked for results by 22 September. She felt that the Committee made the right decision to wait for policy guidance, but urged the DTI to hurry up.

The Chairperson reminded the Committee that it has been invited on an oversight visit on plastics factories. She noted the need to regulate the amount of plastics in products and the closure of various plastics factories. Mr Hill Lewis could attend, and the rest would be confirmed.

The meeting was adjourned.

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