FDI into South Africa will continue to decline, or remain static unless Government implements measures to appropriately protect foreign investors.

On 13 December 2015 former President Jacob Zuma assented to the Protection of Investment Act, 2015 (Act).  The commencement date for the Act was suspended pending the publication of regulations which would govern the mediation facility established under section 13 of the Act.

The Regulations on Mediation Rules, 2017 (Regulations) were eventually published by the Minister of Trade and Industry in the Government Gazette thirty months later, on 13 July 2018.  The Act came into force on the same day. 

By publishing the Regulations and signing the Act into law, the South African government has effectively diluted the protection afforded to foreign investors at a time of anaemic economic growth, high unemployment and increased concern about the protection of property rights highlighted by the ongoing debate about the expropriation of land without compensation. 

This is so for at least two reasons:

First, when the Department of Trade and Industry originally introduced the Promotion and Protection of Investment Bill, 2015 to Parliament, it presented it as a substitute for the fourteen Bilateral Investment Treaties between South Africa and EU member states and Switzerland, which South Africa terminated between 2012 and 2014.  

Contrary to its stated purpose, however, the Act removes the protection afforded to foreign investors in South Africa and replaces them with no greater protection than those enjoyed by domestic investors under domestic law.  The Act achieves this by “substituting” fair and equitable treatment with the right to administrative justice, access to information and access to courts, which everyone already enjoys under the Constitution.

Second, in terms of section 13 of the Act, foreign investors no longer have any right of recourse to investor-state international arbitration which is a key form of investment protection globally.  As a palliative, the Act affords foreign investors the right to refer disputes with the South African government to mediation.

While mediation might assist foreign investors and the government to resolve disputes amicably, it is not an effective substitute for investor-state dispute settlement.  Moreover, if artificially separated from recourse to investor-state arbitration, mediation loses much of its effectiveness, because it is no longer driven by the parties’ interest in avoiding the time, cost and unpredictability of international arbitration. (for more information on this, see my commentary on the draft Regulations which is available here and here).

The absence of mechanisms which afford effective protection to foreign investors is a significant contributor to the continued decline in foreign direct investment to South Africa.  According to the United Nations Conference on Trade and Development’s 'World Investment Report 2018' foreign direct investment into South Africa has continually declined since 2014 (in 2014 US$ 5 771 million was invested; by 2017 this amount decreased to US$ 1 325 million).  Unless the government implements measures to provide confidence in foreign investors, it seems unlikely that this trajectory will change.

Peter Leon, co-chair and partner, Herbert Smith Freehills.