Parliament: Section 25 process
Ad Hoc Committee on Section 25 Hears Bilateral International Treaties Refer to Property, Not Land
EU Parliamentary Question: South Africa's Bilateral Investment Treaties
The Department of Trade and Industry had been requested to brief the Committee on South Africa’s international obligations in respect of the expropriation of land and the obligation to pay compensation when land was expropriated. The DTI had also been requested to explain what had been done to align South Africa’s international obligations with the developmental obligations contained in the Constitution.
The Department of Trade and Industry indicated that its briefing was not a legal opinion but based on the Department’s own experience with Bilateral Investment Treaties to which South Africa was a party. However, the Department recommended that a proper legal opinion would be a very important contribution to the debate. The Bilateral Investment Treaties made no reference to “land” but extended protection to “investments” defined in open-ended terms following an asset-based approach that covered “every kind of asset” of an investor in the territory of the host country with some economic benefit associated with the investment. The treaties recognised the right of host countries to expropriate foreign property, subject to certain requirements. In general, lawful expropriation of foreign investment had to be taken for a public purpose, on a non-discriminatory basis, under due process of law, and based upon the payment of prompt, adequate and effective compensation. Generally, compensation at “fair market value” was always due for expropriation.
In South Africa the Constitution was the supreme law to which all law and conduct had to comply. From an international law perspective, however, bilateral investment treaties constituted an international treaty. The Constitution of any country was seen as part of the ‘internal’ law. A government could not invoke its internal law, including its Constitution, as justification for not meeting its treaty obligations. That was set out in Article 28 of the Vienna Law on Treaties. Some bilateral investment treaties provisions were inconsistent with South Africa’s Constitution, including its transformation objectives. There has been a dramatic increase in the number of claims brought by foreign investors against governments with the first claim in 1987, growing cumulatively to 942 by 2019. Most challenges were against developing country governments and most awards were made in favour of investors. The South Africa Cabinet had adopted a new framework for investment policy-making in South Africa in July 2010. South Africa would only enter into bilateral investment treaties on the basis of compelling economic or political reasons where there was clear benefit; new bilateral investment treaties template had to be designed in line with the Constitution and policy and all bilateral investment treaties then in force had to be terminated.
Terminations of bilateral investment treaties had formally commenced in 2013 but bilateral investment treaties contained what was referred to as a “survival clause”. Following formal termination, the already existing investment protected under those bilateral investment treaties continued for a period of time varying from 10 to 15 or 20 years. 14 bilateral investment treaties had been formally notified for termination, and the survival clause was in effect for 12 bilateral investment treaties. A new Investment Act was adopted in 2015 and a new Model bilateral investment treaties was developed in the Southern African Development Community. The 2015 Investment Act stated that investors had the right to property in terms of section 25 of the Constitution. A minor change to the Investment Act might be required if Section 25 of the Constitution were to be adjusted. However, bilateral investment treaties generally stated that, with respect to the matter of expropriation and compensation, if land of a foreign investor was expropriated and that investor is a citizen of a country that had a bilateral investment treaties with South Africa (including where the survival clause was in effect), the affected investor would be in a position to invoke a legal challenge under the bilateral investment treaties against the Government if the investor were not satisfied by the amount of the compensation.
The attention of the Committee was drawn to the relevant eligibility requirement set out in the United States General System of Preferences. While that system did not constitute an international obligation for South Africa, it did set a standard for countries to benefit from preferential access provided under the General System of Preferences to the United States market in that a beneficiary of the System may not have nationalized, expropriated or otherwise seized property of United States citizens or corporations without providing or taking steps to provide, prompt, adequate, and effective compensation, or submitting such issues to a mutually agreed forum for arbitration.
Members asked how, in relation to legal uncertainty and the survivor clause, could Bilateral Investment Treaties be binding on a country that wanted to address its own internal needs. At the end of March, Parliament wanted to finalise an amendment to an entrenched clause of the Constitution and could not wait for the review and all those things. What was the advice of the Department? Would a country be allowed to settle progressively? Which was supreme – the Constitution or the bilateral investment treaties?
What was the status of trade agreements and would there be any impact on them if and when a change was to be made to Section 25? What happened once the survival clause expired after the specific period in the agreement?
The Chairperson indicated that, in the nature of the process, there would be continuous engagement on the matter and the Committee would discuss it further at its next meeting.
The Chairperson stated that, from the outset, the Committee had said that it wanted to hear from all voices, all political parties, however small they may be, and all other stakeholders as this was a matter that affected the people as a whole and the Committee wanted to make sure that the outcome was legitimate but also consistent with a multi-party democracy. However, SA was not an island as it was part of the global village and part of international treaties and laws. The Committee therefore wanted to make sure that whatever it did was consistent with the country’s international obligations. It was for this reason that the Committee invited the Department of Trade and Industry to brief the Committee on what SA’s international obligations were so that when they deliberated on the Bill, all Members of Parliament could bear in mind what those obligations were. He was pleased that the Department had sent Ambassador Carim to brief the Committee. There could not be a better choice than an ambassador because he would not theorise about international law as he had operated in that space.
He welcomed Ambassador Carim and requested that he present the briefing.
Briefing by Department of Trade and Industry (dti)
Ambassador Xavier Carim, Deputy Director-General: International Trade and Economic Development Division, dti, stated that the Department had received a request from the Committee Secretary to make an input on SA’s international obligations in respect of the expropriation of land and the obligation to pay compensation when land is expropriated. The dti had also been requested to answer the question: What has been done to align our international obligations with the developmental obligations contained in our Constitution?
Ambassador Carim’s brief attempted to answer the question. It was not a legal opinion but based on the DTI’s own experience with Bilateral Investment Treaties (BTIs) to which South Africa was a party.
The Executive had signed 49 BITs but just 22 had entered into force. BITs contained legal undertakings on Expropriation and Compensation that covered property of any foreign investor from the home country with whom SA signed the BIT.
BITs made no reference to “land” but extended protection to ‘investments’ defined in open-ended terms following an asset-based approach. That covered “every kind of asset” of an investor in the territory of the host country with some economic benefit associated with the investment. BITs recognised the right of host countries to expropriate foreign property, subject to certain requirements. In general, lawful expropriation of foreign investment has to be taken for a public purpose, on a non-discriminatory basis, under due process of law, and based upon the payment of prompt, adequate and effective compensation. Generally, compensation at “fair market value” was always due for expropriation.
Relationship between BITs and the Constitution
In South Africa the Constitution is the supreme law to which all law and conduct must comply. From an international law perspective, however, BITs constitute an international treaty. The Constitution of any country is seen as part of the ‘internal’ law. A government cannot invoke its internal law, including its Constitution, as justification for not meeting its treaty obligations. That was set out in Article 27 of the Vienna Convention on the Law of Treaties.
Complacency with BITs was replaced by growing concerns following the spike of legal challenges by investors against Governments across the world in the wake of the financial crisis at the end of the 1990s and early 2000s. South Africa lost a case against a Swiss investor in 2004. That led to a BIT review from 2008-2010. Many other jurisdictions undertook similar reviews at that time.
Some BITs provisions are inconsistent with SA’s Constitution, including its transformation objectives. The main motivation for entering into BITs was that they encouraged inward investment flows but the review showed there was no clear relationship between BITs and increased investment flows.
There has been a dramatic increase in the number of claims brought by foreign investors against governments with the first in 1987, growing cumulatively to 942 by 2019. Most challenges were against developing country governments and most awards were made in favour of investors. The amounts of compensation were growing significantly.
Taking account of the Review, the SA Cabinet adopted a new framework for investment policy making in SA in a decision in July 2010. SA would only enter into BITs on the basis of compelling economic or political reasons where there was clear benefit; a new BIT template had to be designed in line with SA Constitution and policy and all BITs then in force had to be terminated.
Terminations of BITs formally commenced in 2013 but BITs contain what is referred to as a “survival clause”. Following formal termination, the already existing investment protected under those BITs continued for a period of time varying from 10 to 15 or 20 years. 14 BITs had been formally notified for termination, and the survival clause was in effect for 12 BITs. A New Investment Act was adopted in 2015 and a new Model BIT was developed in SADC.
With respect to the matter of expropriation and compensation, the following was relevant:
If land of a foreign investor is expropriated and that investor is a citizen of a country that has a BIT with South Africa (including where the survival clause is in effect), the affected investor would be in a position to invoke a legal challenge under the BIT against the Government if the investor were not satisfied by the amount of the compensation.
Three arbitrators under terms of International Settlement of Investment Disputes (ISID) would make a determination on the matter. While the outcome could not be predicted, arbitrators might take into account national legislation but their primary reference would be the terms of the BIT itself. On the question of compensation, past cases indicated that the standard has tended to be the “market value” of the investment immediately before the expropriation took place. The Government might face a challenge if the new legislation could be construed to impact negatively on the land value of a foreign investor. Some of the jurisprudence on investment treaties referenced a standard of “legitimate expectation” in respect to returns from investment.
Ambassador Carim drew the Committee’s attention to the relevant eligibility requirement set out in the United States General System of Preferences. While that system did not constitute an international obligation for South Africa, it did set a standard to benefit from preferential access provided under the GSP to the US market. The relevant criterion reads:
“A beneficiary may not have nationalized, expropriated or otherwise seized property of U.S. citizens or corporations without providing or taking steps to provide, prompt, adequate, and effective compensation, or submitting such issues to a mutually agreed forum for arbitration;”
Ambassador Carim added that section 10 of the 2015 Promotion and Protection of Investment Act, stipulates: “Investors have the right to property in terms of section 25 of the Constitution.” A minor change to the Investment Act might be required if Section 25 if the Constitution were adjusted.
The Chairperson stated that he had thought that SA was a special case. Perhaps Ambassador Carim should address the Committee on the fact that they were dealing with a country that had been a pariah, a country that had been pursuing policies which were regarded as crimes against humanity and that there were sanctions against the country. Considering the fact that there were sanctions against the country, what would be the effect be of a treaty that the apartheid government had entered into against international law in terms of the validity of such agreements? Also, the question of the legal uncertainty and then the survivor/sunset clause in the midst of that uncertainty - how could that be binding on a country that wanted to address its own internal needs?
The Chairperson further asked Ambassador Carim what he would advise considering the question of the legal uncertainty and then the survivor clause in the midst of that uncertainty? At the end of March, Parliament wanted to finalise an amendment to an entrenched clause of the Constitution and could not wait for the review and all those things. What was his advice?
Ambassador Carim replied that it was a very difficult question to answer. He understood exactly what the Chairperson was saying about SA being a pariah state and the crimes against humanity and that the country was trying to ensure redress but the bilateral treaties had been signed by the new government post-1994 when there had been very little understanding of the treaties but everyone had come to understand that the treaties had teeth and investors could use the treaties to challenge the legitimacy of laws in different countries across the world. Argentina had hundreds of cases against it. SA had just had two cases. The cases were coming against governments and the question of how arbitration would view the expropriation of an investor’s property whose government had a bilateral treaty was very difficult to determine. it was difficult to know what the arbitrators would decide if an investor were to use the BIT to challenge the government measure should their property be expropriated.
What DTI knew from experience was that the primary reference document and the standard had generally been market value that governments had been required to pay. That was the experience under those agreements.
The criticisms that he had pointed out, i.e. the ambiguity and lack of clarity, were the reasons that had led to the submission to Cabinet and the decision by the Cabinet to terminate the agreements. The fact was that the agreements had the survival clause, so they still had teeth. That was the difficulty that had to be navigated.
The Chairperson noted that the Committee had been empowered and he opened the discussion to the Committee. Afterwards, the Committee would have to take relevant decisions and there would be no going back.
The Chairperson noted that if one had to settle something, it depended on one’s ability and it could be said that one would do it progressively and once one was not allowed do it progressively, it meant that one would be asked to do the impossible. He asked whether international laws imposed obligations which were impossible to discharge. Had that been addressed? Could one be allowed to settle progressively?
Mr F Shivambu (EFF) said that the Chairperson was creating a dialogue between him and the presenter. As the presiding officer, the Chairperson had to allow the presenter to present and he had to ask the Members to ask questions. The Chairperson could intervene later. It could not be that the presenter presented and he had a dialogue with the presenter because then he could just have had a private discussion elsewhere, without the Members there. Could he allow the Members of Parliament to interact with the presenter? The Chairperson could have the opportunity to try and synchronise what the Members were saying and then he could make his own observations. If there were clarity questions, he could ask them within that context but he could not be the only one to want to have a dialogue before the Members engaged. That was the modus operandi in every meeting that he had attended in Parliament. He requested that the usual format be used.
The Chairperson responded, with respect, that he had wanted to be sure that the presenter had finalised the presentation and that was why he had put that question. He wanted to be sure that, when he opened for discussion, the presenter had finished with the presentation.
Ambassador Carim said that there were agreements in force that SA had signed and even though most of the agreements had been terminated, there was the survival clause and that had to be understood. If there was a challenge and it went to arbitration and the arbiter said that a certain amount was due, it was in that context that something could done, and maybe could be done over time. He could not answer that. He had brought the terrible news that there were agreements that were currently in force that created certain obligations on governments and certain rights for investors. That was the problem and that was what had to be taken into account.
The Chairperson thanked Ambassador Carim.
Mr P Moroatshehla (ANC) appreciated the information. Information was power. However, information could be used when it was raw without being interpreted. The meeting had to understand that SA was a sovereign state and the sovereignty of SA could not be challenged. Secondly, he admitted that SA did not operate in isolation and interacted with other countries, as in the BITs. Thirdly, the document was like a bombshell – it should have been forwarded in advance so people could have prepared themselves for it. The information came as a shock and a bombshell and they needed others to have engaged with the document before it was presented. Lastly, the Committee was operating according to the mandate of Parliament. People existed within the law and hence he had indicated the sovereignty of the state.
Mr Moroatshehla repeated that it was a bombshell. It was a hard pill. Apart from the 2013 termination of Bills, the country was run from outside. He could hear that the Chairperson was in the same condition and was shocked. The country was still run from somewhere. However, he wanted to believe that at, the end of the day the Committee would come up with what they had to do. He was not a legal person so Members had to bear with his ignorance but, just because he was not a chicken, that did not mean he could not identify a rotten egg. Which was supreme – the Constitution or the BTIs? SA’s Constitution was recognised by the international world, so which one was supreme?
Mr Shivambu said that there was no crisis because if the Members had read Chapter 14 of the Constitution, they would realise that there was no crisis at all because section 1 of the Constitution established SA as a democratic state which was based on constitutional supremacy and the supremacy of the rule of law. Chapter 14 deals with general matters. In section 232, it states: “Customary international law is law in the Republic unless it is inconsistent with the Constitution or an Act of Parliament.” Section 231(4) on international agreements states: “Any international agreement becomes law in the Republic when it is enacted into law by national legislation; but a self-executing provision of an agreement that has been approved by Parliament is law in the Republic unless it is inconsistent with the Constitution or an Act of Parliament.”
Mr Shivambu stated that in 2015, Parliament passed the Protection of Investment Act which was an attempt to unite all the investment treaties that SA had entered into. There was not a lot. There were only 22. Part of what the law said was that all investments had to be established in compliance with the laws of the Republic. Parliament was the legislating body that was mandated by the Constitution to either amend the Constitution or enact legislation so Members could do anything in that context. Whatever investments that came thereafter had to appreciate that law.
Mr Shivambu thought that the Chairperson should have requested the presenter to properly locate where the foreign agreements were that came into SA, what security of tenure they had, etc. He would give an example. More than 90% of the investments in the Special Economic Zones came from foreign countries. That was a fact. The investments in Coega, in the East London, Saldanha, etc. they were happening on state-owned land. What was important was the security of tenure that was guaranteed to those investors. Once they had been allocated land to establish businesses and factories, they would have security of tenure and no one could move them. That was the context in which the discussion should be located.
He added that no one should be shocked. SA just had to be resolute and, from time to time, inform the investment community that that was the law. It happened even in the supposedly most democratic territories, such as the US and the European Union. Laws changed and the investor had to decide whether to stay or to pull out. The Constitution adequately provided for the processes that had to be followed.
The Chairperson stated that not everyone had been there in 2015 and not everyone had been involved in the process and so they reserved the right to be shocked and to feel that there was a crisis. He reiterated that Members had the right to be shocked. This engagement would not necessarily be the first and the last with dti. Ambassador Carim had correctly said that it was not necessarily a legal opinion and therefore the Committee might require a legal opinion.
Mr W Horn (DA) understood that dti only dealt with one part of the international obligations and that the remainder rested with the Directorate for International Relations and Co-operation, but he asked if the bilateral treaties presented were the only international obligations under dti that would be impacted by the whole process of expropriation. What about the trade agreements? What was the status of trade agreements and would there be any impact on them if and when a change were to be made to Section 25?
He said that it would be good for the Committee to get information from dti in respect of the established principle that international agreements had to be consistent with the SA Constitution but also with international law. In International law, property rights were something that fell within the sovereign authority of a specific country but were there any rules that dealt specifically with the changes in the status of property rights and the impact that that had the obligations other than direct investment treaties?
The Chairperson assured Members that they would catch up with the situation as they pursued the process as prescribed by Parliament. Nothing would interfere with the timeframes but the Members would catch up.
Ms K Mahlatsi (ANC) asked about the survival clause and what happened once the survival clause expired after the specific period in the agreement.
Ambassador Carim welcomed the points made by Members. He had deliberately said, in the beginning, that it was not a legal opinion. Based on assessments made during the review process, this had informed decisions made by Cabinet to terminate treaties and to look at a new approach to investment treaties in future. He knew that a number of legal opinions had been presented to the Committee. A legal opinion on the international treaties would be very important and would address some of the questions, especially the first question raised of the relationship between the SA Constitution and international treaties. What was the relationship? SA was part of the international community and subscribed to the Vienna Convention that set out some of the relationships and that had to be taken into account as well as some of the specific details set out in international treaties on expropriation and compensation. That should also be the subject of a full legal opinion. Dti had had only a week or so to prepare, and a proper legal opinion had not been possible, but it would be a very important contribution to the debate.
On the question of trade agreements, Ambassador Carim said that it was not clear but, offhand, he would say that trade agreements signed by SA did not have provisions that spoke directly to expropriation or compensation. International trade agreements were largely framed around tariffs, tariff liberalisation and rules about how SA dealt with customs, standards in international trade, trade in goods in particular and not in the same way as investors dealt in property. It was about cross-border trade. He would have to think again but he could not imagine that trade agreements had binding obligations.
On the other question about international law and property, DIRCO and a legal analysis could give an understanding of that relationship.
He clarified the survival clause in case he had not been clear. If the agreement had been signed in 1995 and the period was ten years, it reached its first termination period in 2005 but it was automatically renewed for another ten years if not terminated one year before. Only once the treaty had been terminated, then the investments made during the validity period were protected, according to the treaty, for another 10 to 20 years. The concerns about the agreements had been a motivation to terminate the agreements.
The Ambassador had noted that the Chairperson had said that this was a first engagement and it was a good thing to have the issues out in the open and to have them discussed via a proper legal opinion.
The Chairperson was mindful that dti had been given short notice but in terms of the brief given, the Ambassador had done exceptionally well. The nature of the process was that there would be continuous engagement and the Ambassador had indicated that he was open to further engagement so he had discharged himself well.
The Chairperson requested Members to engage with the document and, if necessary, they would request further input. The Ambassador had done very well. He noted that the invitation was not directed to him personally and so he and the Department had had short notice.
He thanked Members for their attendance.
The meeting was adjourned.
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