Debate on the Protection of Investment Bill, 2015 in Parliament by the Minister of Trade and Industry Dr Rob Davies
17 November 2015
Madame Speaker, Honourable Members, it gives me great pleasure to introduce the “Protection of Investment Bill, 2015”.
Foreign direct investment (FDI) is currently protected by more than 3 000 International Investment Agreements (IIAs) worldwide. Most of these agreements feature an Investor-State Dispute Settlement (ISDS) mechanism to enforce investor rights. These agreements are mostly structured along the “old architecture that allows investors to sue States in arbitral fora and give investors the right to bypass domestic courts.
One may legitimately ask whether the rule of law is adequately upheld in the investor-state dispute settlement (ISDS) system or in the BITs that underpin it. BITs, particularly early generation treaties, contain provisions that are imprecise and when subjected to international arbitration, leave wide scope for inconsistent and unpredictable outcomes.
There is also overwhelming awareness of deficiencies in ISDS, including by the EU, with respect to its ad hoc nature, its fragmentation and a perceived lack of transparency and legitimacy. The problems appear deep-seated as jurisprudence in this area continues to diverge and, in the absence of an appellate process, often falls short of meeting the standards of legal correctness and consistency.
Imprecise treaty provisions, inconsistent arbitration awards, combined with a growing number of investor claims that are challenging a widening ambit of government public policy measures, are cause for growing concern. The expansive definitions of rights and protection open the door for narrow commercial interests to contest important policy matters and vital national interests subjecting these to unpredictable international arbitration outcomes that could be interpreted as a direct challenge to constitutional and democratic policy-making.
Proponents tend to argue that BITs encourage investment and strengthen the rule of law particularly in jurisdictions where court systems are weak or biased against foreigners. This premise is contested. Studies on BITs and FDI suggest the relationship is, at best, ambiguous and that BITs are neither necessary nor sufficient to attract FDI.
The OECD states that some studies have found very weak, no or even negative correlation with BITs. Indeed, South Africa receives FDI from investors in countries with whom it has no BIT and often little or no FDI from others where a BIT was in place. In addition, studies reveal that FDI inflows did not correlate with more or less stringent dispute settlement mechanisms in IIAs.
In recent years there has been an increase in the number of ISDS cases. The 2015 Investment Report by UNCTAD reveals that ninety-nine (99) governments around the world have been respondents to one or more known ISDS claims. Most cases are brought by claimants in developed countries against developing countries although it is interesting to note that cases against developed countries are increasing.
Headline-grabbing cases such as Vattenfall v. Federal Republic of Germany relating to environmental laws, and Philip Morris Asia v. Australia on plain packaging on tobacco are of importance as they give a clear indication that investors are not challenging expropriation but challenging the rights of Governments’ to regulate in the public interest.
What is of concern is the increase in awards to investors. The OECD puts an average cost of defence against claims at almost US$10 million (equivalent to R120 million) in 2014 but individual cases have generated significantly higher costs including a recent case that cost over US$120 million.
South Africa has also had its own experience of investment disputes. A Swiss private citizen launched an arbitration claim against South Africa in 2001 under the terms of the Switzerland-RSA investment treaty due to a farm that was vandalised. RSA was found to have breached the treaty obligation to provide “protection and security” to the investor.
The second case was by Italian investors challenging the Mineral and Petroleum Resources Development aimed at alleviating the effects of the historical racial inequity that occurred under the apartheid system. The claimants challenged the policies as a violation of South Africa’s international obligations under its BITs and claimed that they amounted to expropriation under international law.
The investment policy landscape is changing globally. Both developing and developed countries are either undertaking reviews or have reviewed their investment frameworks so as to provide an environment that facilitates investment while ensuring that governments are able to regulate in the public interest.
The EU has also undertaken some changes which include moving the competence to negotiate IIAs to the Commission, defining more precisely investment to be protected and ensuring that substantial business operations benefit from protection, as well as preserve the right of governments’ to regulate in the public interest. Most importantly, the EU is considering terminating BITs among EU Member States as investment will be governed by EU law. These reforms are consistent with the approach we have taken in the development of this Bill.
South Africa is an early mover and is not apologetic for reforming its investment policy and has been participating in various international platforms to shape the new paradigm. The approach is informed by a three-year review of BITs. The review assessed the role of foreign investment in South Africa, the levels of protection afforded to investment, and the risks and benefits of BITs.
Overall, the review suggested that the BITs open the door for narrow commercial interests to subject matters of vital national interest to unpredictable international arbitration that may constitute direct challenges to legitimate, constitutional and democratic policy-making. It is on that basis we agreed to develop an Investment Act that is aligned to the Constitution and clarifies typical BIT provisions under South African law.
In a presentation to the Portfolio Committee, the Director of the Investment Enterprise at UNCTAD, James Zhan described the Bill before the House today as “…an important step towards a “new generation” investment policy framework for South Africa” He said the Bill was “timely” and reflects some of the new international good practise in investment policy making.
We have adopted the approach of developing a law of general application that covers all investors and their investment, regardless of origin. South Africa already provides strong protection to investors in terms of the framework provided by the Constitution and other relevant legislation: It is also important to recall that, as a member of the WTO, South Africa subscribes to a range of disciplines and rules that provide multilateral guarantees to foreign investors.
Fundamentally, the underlying philosophy of the Bill is to clarify the standard of protection that an investor may expect in the Republic, and to promote all types of investments by creating a predictable business environment that is readily understandable to an investor. The Bill guarantees the rights of investors in accordance with the Constitution.
In addition to this, the Bill contains international investment law concepts such as national treatment, physical security of investment, legal protection of investment and transfer of funds in line with constitutional principles and applicable norms. This is aimed at re-assuring investors that South Africa is, and will remain, open to FDI and will continue to provide strong protection to investors.
In developing the Bill, we have taken into account all the concerns raised. Our aim is to modernise South Africa’s policy approach to foreign investment in view of national, regional and global developments. Regionally, investment is protected through the SADC Finance and Investment Protocol. At the highest political level of SADC, a decision has been undertaken to amend the Investment Chapter of the Finance and Investment Protocol in such a manner that will be consistent with the Bill.
That process is finalised pending a decision by Council and Summit through the relevant structures. A SADC Model BIT has been adopted and is aligned to the Bill. In terms of the Constitution, an international agreement becomes law in the Republic when enacted into law by national legislation. As such the FIP binds RSA at the international level but does not prevent RSA from enacting its own legislation. Furthermore, processes are underway through the Tripartite FTA and the recently launched Continental FTA negotiations to develop a continental approach to investment.
I should also point out that it is not the intention nor the mandate of the Bill to develop the law in areas that are not directly in the scope of investment regulation. Section 25 of the Constitution provides adequate protection to investors from arbitrary expropriation and deprivation. There is emerging jurisprudence on deprivation, it is not the role of this Bill to clarify and interpret law.
I want to assure this House that a process is in place to modernise all our investment relations with all the partners we have BITs with through various platforms. The Bill does not interfere with the protection afforded to investors under the existing Bilateral Investment Treaties and they will all continue to be protected for the period and terms stipulated therein.
South Africa through this Bill provides strong protection to investment in accordance with the Constitution. The Constitution does not allow us to grant better treatment to foreign investors than is provided to domestic investors, or to grant them enhanced protections that are not available to domestic investors. The Bill continues to provide protections to foreign investors in a manner that is consistent with the Constitution, and that is in accordance with international best practice, and international customary law.
To conclude, I wish to confirm that this Bill is crucial to strengthen the legislative environment to modernise the South African investment regime.
Thank you, Madam Speaker.
Issued by the Department of Trade and Industry, 17 November 2015