Comments by Peter Leon to the Herbert Smith Freehills Client Breakfast Seminar, Paris, Tuesday, 4 July 2017
QUO VADIS SOUTH AFRICA – WILL SOUTH AFRICA REMAIN AFRICA'S MOST DEVELOPED ECONOMY?
INTRODUCTION
As we speak, South Africa’s leading anti-apartheid liberation movement, the African National Congress (“ANC”), is engaged in its fifth quinquennial national policy conference since the party was unbanned by the apartheid government in 1990. It comes at a time of unprecedented crisis for both the ANC and the country.
While the country endures its first recession since the 2008-2009 global financial crisis, the ANC is consumed by intensifying factional strife in the lead-up to its elective conference in December 2017, where delegates will choose a successor to Jacob Zuma, who cannot serve as president of the country after his second five-year term ends in 2019.
Support is closely divided between two broad camps, representing different visions for the future of the party and the party. The somewhat oversimplified position is as follows:
Those loyal to Jacob Zuma seek to replace him with his ex-wife, Nkosazana Dlamini-Zuma, who most recently served as Chair of the African Union, and previously as Minister of Health, Home Affairs and Foreign Affairs. This faction proposes a programme of “radical economic transformation”, designed to redistribute wealth from “white monopoly capital” to emerging black entrepreneurs. This entails a tendency towards economic protectionism and state participation in key sectors such as mining and even banking.
Those opposed to Zuma mostly support the current deputy president, Cyril Ramaphosa, who was the ANC’s chief negotiator of the post-apartheid Constitution but spent most of the democratic era becoming one of South Africa’s most wealthy and well-known business figures. This faction broadly subscribes to a free market-based strategy of “inclusive growth”, arguing that “radical economic transformation” is a mask for further enrichment of politically-connected elites, which will only weaken investor confidence and thus hamper growth.
At this policy conference, the ANC is supposed to chart a course for the country (as much as the party) out of the current political and economic malaise. While it would be over-optimistic to expect certainty to emerge any time before December, the policy resolutions adopted tomorrow should give some indication of where the country is going. But before attempting to answer the question “quo vadis South Africa?”, it is useful to ask from where the country has come (“quo venit South Africa?”).
QUO VENIT?
Mandela and Mbeki administrations
When the ANC assumed power in 1994, it recognised that its mission of lifting millions of black South Africans out of chronic poverty would require significant economic growth. The party thus set about dismantling the statist, isolationist economy bequeathed by the apartheid regime.
In 1996, South Africa adopted a supreme Constitution, with a justiciable Bill of Rights, entrenching the values of a liberal democracy, while recognising the need for affirmative action and socio-economic transformation. Importantly, the Constitution established a sophisticated network of independent institutions to deepen and defend democracy, including:a multiparty Parliament with the authority and duty to hold the Executive accountable;an independent Judiciary, led by a new Constitutional Court, empowered to strike down any errant legislative or executive act;a National Prosecuting Authority, mandated to combat crime “without fear, favour or prejudice”;a Public Protector (or State Ombudsman) to investigate and remedy corruption and maladministration;an Auditor-General to monitor public expenditure;a National Treasury to ensure “transparency and expenditure control” in public finance; andan independent Reserve Bank “to protect the value of the currency in the interest of balanced and sustainable economic growth”.
Building on these domestic foundations, the administrations of Nelson Mandela and Thabo Mbeki pursued a concerted strategy of economic liberalisation, involving the following key measures:
Between 1995 and 2009, South Africa signed bilateral investment treaties (“BITs”) with forty-nine states (half of which entered into force). These entitle foreign investors to protection from (among other things) discriminatory, arbitrary or abusive treatment, as well as undue or undercompensated expropriation. Importantly, investors are entitled to enforce these standards directly by taking the host government to international arbitration, without needing diplomatic impetus from their home government. One of South Africa’s first BITs was with France, which was signed on 11 October 1995 and came into force on 22 June 1997.
In 1999, South Africa concluded the Trade, Development and Co-operation Agreement (“TDCA”) with the European Union (“EU”), liberalising 90% of the trade between them under an asymmetric tariff phase-down arrangement over twelve years.
In 2006, President Mbeki spearheaded the adoption by the Southern African Development Community (“SADC”) of an ambitious Protocol on Finance and Investment ("SADC Protocol"), which entered into force in 2010. Among other things, this extended BIT-type protection to investors from anywhere in the world, enforceable through international arbitration (after exhaustion of available domestic remedies).
Under these conditions, South Africa emerged post-liberation as the most developed investment destination in Africa, and a valued trade partner for France and other EU members. The country’s information technology, telecommunications and financial systems likewise responded to the needs of foreign investors, as well as enabling South African businesses to participate in an increasingly competitive global economy.
By 2010, South Africa was host to some US$180 billion in foreign investment stock, compared with only US$15 billion in 1995 and US$43 billion in 2000. It was also the highest-ranked African country in the World Economic Forum’s 2009-2010 Global Competitiveness Report, and 45th highest in the world.
Many strong and sophisticated private institutions flourished under these conditions, not only businesses and industry chambers, but civil society organisations and an independent investigate press. Private banking institutions, in particular, steadily earned a world-class reputation, and earned acclaim for their resilience during the 2008/2009 global financial crisis. Thus, in the 2009-2010 Global Competitiveness Report, South Africa ranked fifth in the world for the soundness of its banks, sixth for financial market sophistication, and ninth for the strength of investor protection.
There were, of course, policy mistakes made and opportunities missed under the Mandela and Mbeki administrations. One of these was an inexplicable failure to heed the recommendations of the South African Law Reform Commission in 1998, that South Africa should modernise its international disputes regime by domesticating the UNCITRAL Model Law on International Commercial Arbitration, as well as by joining the Washington-based International Centre for the Settlement of Investment Disputes (“ICSID”). These steps would have helped considerably to consolidate South Africa’s position as the preferred gateway to Africa for foreign investors.
Zuma administration
Regrettably, many more mistakes have been made after the 2008/2009 global financial crisis, which coincided with South Africa’s own internal political crisis: in September 2008, the ANC recalled President Mbeki from office months before the end of his term, amid allegations that he had orchestrated the institution of corruption charges against Jacob Zuma (who had succeeded him as ANC president nine months earlier). The independent anti-corruption unit prosecuting Zuma had by then been disbanded by Parliament, and replaced with a police unit under strict executive control. In April 2009, the charges were dropped (on grounds which the High Court has since declared irrational and invalid), and Zuma was inaugurated as President the following month.
The Zuma administration has, in many ways, been characterised by attempts to erode the independence of public institutions (such as the National Prosecuting Authority, the Public Protector and more recently the National Treasury and Reserve Bank), as well as to encroach on constitutionally-protected property rights (particularly in the mining sector). Private institutions, such as the press and banks, have not been spared interference.
In its international economic relations, the Zuma Administration has taken South Africa in a more statist and protectionist direction.
In the 2000s, South Africa had faced two arbitration claims under its BITs with Switzerland, Belgium-Luxembourg and Italy. Starting in 2012, the Zuma administration unilaterally terminated those BITs, as well as South Africa’s BITs with France, Germany, the United Kingdom, and seven other EU members. (South Africa's BIT with France was terminated with effect from 30 August 2014; investments made before that date will continue to enjoy its protection until 29 August 2034.)
To “replace” these BITs, Parliament adopted a domestic statute in late 2015, which offers much weaker standards of protection and, significantly, rules out any recourse to investor-state international arbitration, despite being warned that this would be inconsistent with the SADC Protocol.
South Africa has since engineered an amendment to the SADC Protocol, adopted on 31 August 2016, but apparently not yet in force. Among other things, it will fundamentally invert the nature and purpose of the Protocol, by limiting the definition of “investor” to those from within SADC, thus excluding foreign (and French) investors from its protection.
Furthermore, the TDCA has been replaced with the Economic Partnership Agreement ("EPA"), signed on 10 June 2016 between the EU and South Africa (as well as Botswana, Lesotho, Mozambique, Namibia and Swaziland). Unlike the TDCA, the EPA explicitly permits South Africa to introduce temporary ad valorem export duties or taxes, of up to ten per cent, on up to eight products, for up to twelve years (subject to certain exemptions).
Meanwhile, investor confidence has suffered. Releasing its annual World Investment Report last year, the United Nations Conference on Trade and Development (“UNCTAD”) revealed that in 2015, SA’s foreign investment inflows fell to their lowest in 10 years: US$1.77 billion, 69% lower than 2014 (US$5.77 billion) and 79% lower than 2013 (US$8.3 billion).
At the same time, investments by South African firms into other countries declined to US$5.3 billion, 30% lower than 2014 (US$7.7 billion). By 2015, the country was host to only US$125 billion in foreign investment stock, 30% less than in 2010 (US$180 billion) and, remarkably, 23% less than South African businesses held abroad (US$163 billion). South African has thus found itself prematurely in the position of a net capital exporter, which simply cannot be sustained.
Over the past year (which followed five years of slow growth, rising unemployment and mounting public debt), South Africa was warned that its sovereign credit rating could be downgraded to sub-investment (‘junk’) status, if it did not reverse the trend. The diagnosed problems included prolonged regulatory uncertainty in the mining sector, and perennial loss-making maladministration in state-owned enterprises.
These warnings were apparently not heeded, and after Zuma abruptly dismissed Pravin Gordhan and his deputy from the Finance Ministry in March this year (after a failed attempt to prosecute Gordhan for fraud), South Africa’s sovereign credit rating suffered accordingly. In April, S&P Global and Fitch both downgraded the country’s foreign currency rating to one notch below investment grade (with S&P Global also dropping the local currency rating to the same sub-investment grade). Last month, Moody’s downgraded the country’s foreign and local currency ratings to the lowest investment grade (one notch above ‘junk’). South Africa now faces probably its poorest economic outlook since the ANC assumed power in 1994.
QUO VADIS?
At the beginning of last month, South Africa officially entered its first recession since the global financial crisis in 2008-2009, after its GDP shrank by 0.7% in the first quarter of 2017, following a 0.3% contraction in the last quarter of 2016. Opening the ANC’s policy conference last Friday, President Zuma admitted that, "[a]t the time of the budget in February the economy was expected to grow at a low 1.3% in 2017. Given the current difficulties, even this low growth rate may not be achieved."
This policy conference is supposed to yield a prescription for this diagnosed malaise. While the pro-Zuma faction proposes a more protectionist strategy of “radical economic transformation”, their opponents broadly agree on honouring the economic fundamentals of the Mbeki administration. The conference’s discussion document on economic transformation spoke of the need to “ensure that minerals legislation provides a predictable, stable, competitive and certain regulatory environment for increased mining activity and investment”.
In a possible attempt to pre-empt this discussion, the Minister of Mineral Resources published a revised Mining Charter (so-called Mining Charter III) last month, which wiped ZAR50.69 billion off the value of JSE-listed mining stocks within four days, and prompted S&P and Fitch to reaffirm their decision to downgrade South Africa’s sovereign credit rating to ‘junk’. The new Mining Charter, if implemented, will bring about significant changes in respect of the black ownership, procurement and employment equity requirements imposed on mining companies:
Existing mining right holders will have to top up their black shareholding from existing levels to 30%, and will not be credited for previous empowerment deals from which black partners have since exited. Applicants for new prospecting rights will need to have at least 50 per cent plus 1 of their voting shares owned by black South Africans. All holders will have to procure at least 70% of their goods from South African manufacturers, and at least 80% of their services from South African providers.These drastic changes could not have come at a worse time for the South African mining industry, which shed around 70,000 jobs between 2012 and 2016.
Despite this bleak picture, any analysis of South Africa since the advent of democracy has to recognize the relative strength of its institutions, both public and private. Where Parliament has failed to hold the Executive accountable, this function has been taken up by public institutions like the Auditor-General, the Public Protector, the National Treasury and, importantly, the Judiciary, as well as by private institutions such as the press and civil society.
After a challenge by civil society, the Constitutional Court in the 2011 struck down the law that disbanded the country’s anti-corruption unit, finding that its replacement was insufficiently independent from the Executive to combat corruption effectively. The Court ordered Parliament to correct the defect within eighteen months, which Parliament purported to do by passing another law, just a few days before the deadline. That law too was challenged and found wanting, in 2014, but the Constitutional Court then corrected the defect itself, rather than giving Parliament another opportunity to do so.
In this manner, the Judiciary has, by and large, responded robustly by upholding the rule of law when the Executive has exceeded its powers or has been given excessive authority by Parliament, or when Parliament has failed to hold the Executive accountable for the exercise of its powers.
This was demonstrated powerfully by the Constitutional Court at the end of March last year. In a unanimous judgment, the Court upheld a report by the previous Public Protector, Advocate Thuli Madonsela, in which she had directed the President personally to repay the state a portion of R246 million improperly spent on improvements at his private residence in rural KwaZulu-Natal. The Court declared that the President had contravened the Constitution by failing to comply with Madonsela’s directions, and that Parliament had likewise contravened the Constitution by purportedly absolving him from doing so.
Only last month, the Constitutional Court, again unanimously, delivered a powerful judgment against the President and the Speaker of Parliament, holding that an imminent motion of no confidence in the President may be held by secret ballot, and that the Speaker has very little rational room to refuse such a process.
These judgments, and numerous others, have highlighted the extent to which the Presidency and Parliament – two vital constitutional institutions – have been weakened by their occupants under the Zuma administration. At the same time, however, they indicate how the Judiciary, as well as the Public Protector, have robustly upheld the rule of law
South Africa thus still has strong public and private institutions to protect local and foreign investors (as well as the economy as a whole) from arbitrary and abusive regulatory actions. Despite slipping to 47th place overall (two places below Mauritius) in the World Economic Forum’s 2016-2017 Global Competitiveness Report, South Africa ranked tenth in the world for the efficiency of its legal framework for challenging regulations, sixteenth for judicial independence and fourteenth for the strength of investor protection. At the same time, South Africa ranked second in the world for both the soundness of its banks and the extent to which financial services firms meet business needs (beaten only by Finland and Hong Kong respectively).
Mining Charter III will thus face intense public and judicial scrutiny. The Chamber of Mines has already instituted a High Court application to prevent the Minister from implementing the Charter, pending an application to have it permanently set aside. In my view, Mining Charter III does appear to be inconsistent with the Constitution:
First, it may be ultra vires, as the Mineral and Petroleum Resources Development Act, 2002 (“MPRDA”), authorised the issuing of only one charter, within six months of the MPRDA taking effect, which expired in late 2004.
Second, it likely violates the constitutional doctrine of the separation of powers for the Minister to create legal rights and obligations (as he purports to do in the Charter), which is Parliament’s function, rather than only to create mechanisms for the proper exercise of rights and obligations, which is the function of the Executive.
South Africa’s courts have also consistently held the government to its international obligations. On this basis, the courts could strike down the Charter’s quotas for the procurement of goods and services from local black-owned companies, which appear to contravene South Africa’s obligations under the General Agreement on Tariffs and Trade and the General Agreement on Trade in Services, by which South Africa became bound in 1994 upon joining the World Trade Organisation.
Finally, the Charter’s requirement that mining right holders must write off any outstanding balance on vendor loans to black shareholders, if these vendor loans are not repaid through dividends after ten years, arguably violates the constitutional prohibition on arbitrary deprivation of property.
Clearly, South Africa is learning its constitutional lessons the hard way, with its institutional checks and balances being tested through costly error and trial, but ultimately prevailing on the side of the rule of law and property rights. A proper analysis of South Africa’s development since the advent of democracy reveals – perhaps paradoxically – how the greatest threats to the country’s economic growth have finally brought to the fore its greatest guarantors. These institutions should help ensure that the country remains resilient enough to tackle its current political and economic headwinds, and hopefully that it remains Africa’s most developed economy.
