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South Africa moves boldly toupgrade investment bill.

Summary: South Africa has embarked on a radical new direction over the protection of foreign investments in the country. It is in the process of replacing several international agreements with the provisions of its new investment bill. What are the implications? Christian Vidal-Leon* guides you through the legal minefield.

Over the last year, South Africa has unilaterally terminated a large number of International Agreements on Investment Protection (IIAs), which were aimed at protecting foreign investments in South Africa, but also South African investments in such third countries. At the same time, the government has published, for public consultation, an investment bill, incorporating certain, but not all, of the standards of investment protection contained in the IIAs recently terminated.

The new legal approach t o protecting foreign investments is a function of the government's dissatisfaction with the constraints IIAs imposed upon South Africa to regulate in critical areas - such as the Black Economic Empowerment policy and the fight against AIDS and other diseases - while not delivering the expected outcome to attract sufficient foreign investments into the country. By replacing international rules on investment protection with domestic regulation, the government seeks to avert international legal scrutiny over domestic policies of significance for the nation.

The investment bill provides for non-discrimination between domestic and foreign investments in like circumstances. It also contains rules on expropriation, security on investments and transfer of funds.

In contrast, the investment bill does not include explicit provisions - set out in the IIAs terminated over the last year - on whether South Africa may afford differing treatment among investments from different countries; the so-called 'indirect expropriation', which means regulatory changes that render the economic value or enjoyment of the investment worthless; and the fair and equitable treatment standard.

'In the public interest' clause

Moreover, the investment bill incorporates a provision - captioned 'sovereign right to regulate in the public interest' - which allows the government to impose measures that, even if affecting investments, are necessary for the pursuance of social or economic policies.

Such policies, according to the bill, are those to: redress historical, social and economic inequalities; uphold democratic values and rights guaranteed in t he Constitution; promote a nd preserve cultural heritage; foster economic development and industrialisation; and further socioeconomic rights.

This provision constitutes a marked difference from the IIAs, where policymaking powers were not clea rly delimited.

The 'right to regulate' in foreign investment law has acquired international relevance over the last five years or so.

The European Union, for instance, has released to the public its new approach to negotiating future IIAs. It places the emphasis on the 'right to regulate' - noting that new rules on investment protection must be directed at establishing a stable and reasonable business environment, instead of giving rise to disguised challenges against legitimate changes to regulatory frameworks.

The US, Canada and Singapore have equally appeased domestic concerns over the implications of new IIAs by assuring that any new agreements will not compromise the regulatory space necessary to accomplish social and economic goals.

It is important to note that the new legal framework for investment protection seeks to afford at least some protection to foreign and domestic investments within South Africa, but leaves South African investments abroad largely unprotected.

Since the international community is moving towards upholding governments' regulatory space in the field of investment protection, South Africa should not neglect continuing consultations with other countries with a view to agreeing shared standards of investment protection in the future to the benefit of South African investments abroad.

South Africa still bound to agreements Contrary to its apparent intention, the termination of IIAs does not render South Africa immune from scrutiny on the international level, including by international tribunals.

As an initial matter, the IIAs South Africa has terminated contained a 'survival clause', whereby investments are to be fully protected by t he standards of investment protection for an established period of usually 10 years subsequent to the termination of each IIA. South Africa thus remains bound to afford foreign investments all the protections set out in the applicable IIA during the specified survival period.

There are a sorules under international law that remain applicable to foreign investments irrespective of whether there is an IIA in force - the so-called ' international minimum standard'. For instance, if there is denial of justice or gross discrimination against foreign investments, or a group thereof, South Africa may be liable under international law.

Albeit rare, the International Court of Justice has ruled on a number of investment protection cases involving countries where no IIAs existed between them. Thus, the possibility to ventilate a case against South Africa on the international plane remains possible regardless of the termination of IIAs.

Under the law of the World Trade Organisation (WTO), South Africa also retains a series of international obligat ions concerning foreign investments. First, it has made several commitments in respect of the commercial presence of foreign services and service suppliers, that is to say, foreign companies established in South Africa to supply services.

These commitments are foreseen in the General Agreement on Trade in Services (GATS) and include certain obligations such as: (i) treating foreign services and service suppliers in a uniform, impartial and reasonable manner; (ii) providing full access and not to interfere with course of business of service suppliers in South Africa; and (iii) non-discriminatory treatment among foreign services and service suppliers, and as between them and their South African counterparts. Interestingly, the GATS contains public policy exceptions, which are listed in exhaustive terms. It remains to be seen whether any inconsistencies of the investment bill with the GATS are justified by such public policy exceptions.

Second, the investment bill asserts South Africa's 'right to regulate' for t he economic development and industria l isat ion of t he country. However, under the WTO TradeRelated Investment Measures Agreement, South Africa may not require companies - whether foreign or local - to use or purchase a minimum amount of domestic products. This issue is particularly relevant in recent times as measures requiring indigenisation thresholds have propagated, especially in developing countries. In fact, several developed countries have launched WTO disputes against frequent users of this type of measures, notably Argentina, Brazil, India and Indonesia.

Therefore, the new investment legislation should not be used by t he South African Government to require of foreign investments the use or purchase of a minimum amount of domestic products.

Third, the investment bill seeks to limit the possibility to claim compensation for the use of patents necessary for the production of key medicines without the authorisation of the right holder.

The WTO Trade-Related Aspects of Intellectual Property Rights Agreement enables South Africa to use a patent without authorisation of the right holder, provided that the government complies with a series of requirements, which include the payment of adequate remuneration. Thus, even though the investment bill seems to shield South Africa from compensating patent holders, an international obligation to do so remains valid and enforceable. The period for public consultation regarding the investment bill ended on 31st January 2014, and the legislative process is set to begin in the coming months.

When adopting and implementing the new piece of legislation, t he government should not lose sight of the economic and legal importance to a f ford foreign investments a transparent, stable, reasonable and nondiscriminatory business environment. Investment protection rules must not be seen as enabling foreign companies to challenge laudable domestic legislation, but rather as a contributor to a business environment which brings about development and growth. In the end, it should be remembered that foreign investments have traditionally played a key role in the prosperity of South Africa's economy. ua

* Christian VidalLeon is Manager, Pricewaterhouse Coopers, South Africa and was the former Legal Officer at the World Trade Organisation.

Contrary to its apparent intention, the termination of IIAs does not render South Africa immune from scrutiny on the international level, including by international tribunals

Investment protection rules must not be seen as enabling foreign companies to challenge laudable domestic legislation, but rather as a contributor to a business environment which brings about development and growth

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Publication:African Banker
Geographic Code:6SOUT
Date:Feb 17, 2014
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