Amidst growing economic uncertainty, new report details how foreign investments are protected in South Africa

By John Bell, Partner, and Jackie Lafleur, Senior Associate, Dispute Resolution Practice, Baker McKenzie, Johannesburg

Baker McKenzie’s newly published report  – Preserve, Protect and Defend: Global Nationalization Risk –  looks at, among other things, the treaty framework that underpins foreign investment decisions in numerous countries around the world, including South Africa. The report outlines how such treaties are valuable to international investors and how investments can be structured to take advantage of them. The report details how South Africa has been rethinking the use of these treaties and what further legislation has been put in place to protect its investors. In times of global economic uncertainty, which has been extensively worsened by the COVID-19 pandemic, countries who are able to properly protect foreign direct investors will have the upper hand.

An investment treaty is an agreement made between two or more states, containing reciprocal undertakings for the promotion and protection of investments made by nationals and companies of one state in the territory of the other state(s). In recent years, South Africa has reviewed its Bilateral Investment Treaties (BITs) on the basis that it believed that they were too restrictive and outdated. Since 2012, the country has terminated its BITs with many European countries, including Denmark, Spain, Belgium, Luxembourg, Switzerland and the Netherlands. Some have remained in place, however, and as of March 2020, the country remains a party to 12 BITs, currently still in force – namely China, Cuba, Finland, Greece, the Islamic Republic of Iran, The Republic of Korea, the Republic of Mauritius, Nigeria, Russian Federation, Senegal, Sweden and  Zimbabwe. South Africa is also a party to various Multilateral Investment Treaties (MITs), including the Free Trade Agreement between the European Free Trade Association  and Southern African Customs Union States, the Cotonou Agreement between, inter alia, European Union member states and African states and the Trade, Development and Cooperation Agreement between European Community States and South Africa. 

To replace, the BITs,  the Protection of Investment Act in 2015 (the Act) came into effect on 13 July 2018. The Act aims to protect investments in South Africa in accordance with, and subject to, the Constitution, while balancing the rights and obligations of investors. The Act applies to all investments in South Africa that are made in accordance with the Act and the intention is that it will eventually replace all BITs. The Act does not, however, replace enforceable BITs to which South Africa is a party . Further, BITs that have been terminated may still operate for a period of time after such termination because many BITs contain sunset clauses. Consequently, these BITs will be upheld, regardless of the Act’s commencement.

The protections afforded to investors under the Act differ significantly to those under BITs. The Act provides that foreign investors and their investments must be accorded a level of physical security as would be generally provided to domestic investors in accordance with minimum standard of customary international law and subject to available resources and capacity. Consequently, the extent of security is limited in the sense that it is conditional on the availability of resources and level of capacity, only applies to physical security and not legal and commercial security and the level of protection need only meet the minimum standards of customary international law.

In terms of expropriation of property, Section 10 of the Act provides that investors have the right to property in terms of section 25 of the Constitution. Section 25 provides that property may only be expropriated for a public purpose or in the public interest and subject to compensation, the amount, and time and manner of payment of which have either been agreed to by those affected or decided by a South African court. In addition to this, the payment must be “just and equitable”, having regard to a number of circumstances including, inter alia, the history of the acquisition of the property, the current use of the property and the purpose of the expropriation. This is at odds with expropriation provisions under most BITs, which provide for compensation that must be adequate, prompt and effective.

The Act does not contain a most favoured nation treatment standard.  It includes a national treatment standard and provides that foreign investors and their investments must not be treated less favourably than South African investors “in like circumstances.”   What constitutes “in like circumstances” will include a consideration of factors such as the effect of the foreign investment in South Africa, the sector that the foreign investments are in and the aim of any measure relating to the foreign investments. This differs from the standard national treatment provisions found in BITs which do not qualify the standard of treatment.

Importantly, the Act does not provide for investor state international arbitration as is the case under BITs and, accordingly, all disputes relating to investments that fall under the Act are subject to South African courts. Where an investor has a dispute in relation to an investment, the investor may, within six months, request that the Department of Trade and Industry facilitate the resolution of the dispute by appointing a mediator. In addition to this, an investor may approach any competent court, independent tribunal or statutory body within South Africa for the resolution of the dispute.

Although provisions of the Act allow for the government to consent to international arbitration, this can only be done where the investor has exhausted all domestic remedies and both South Africa and the home state of the investor have consented to conducting the international arbitration. It is important to note, however, that the arbitration will then be between the two states and not between South Africa and the investor.

The Act has faced some criticism on the basis that it may not afford investors the type of protection traditionally offered under BITs, and restricts their ability to pursue international arbitration claims. For that reason, claims under investment treaties remain attractive to foreign investors, notably because they can be pursued before international tribunals without having to exhaust local remedies. That being said, the Act has retained the core principles of BITs and has not imposed any new obligations on investors. Given that the Act only recently came into effect, its long-term effects remain to be seen.