Comments from Peter Leon, partner and co-Chair at law firm Herbert Smith Freehills delivered at an economic panel discussion, "Spotlight on South Africa", hosted by the Center for Strategic and International Studies (CSIS) Africa Program, in Washington, D.C., 28 September 2016

“A healthy investment climate for both domestic and foreign investors requires clear and consistent policies, as well as the robust protection of property rights. Essential to these are independent institutions which promote as much as protect good governance, staffed by appropriately qualified personnel who uphold the rule of law.

Extraordinary legal developments during the seven years of the Zuma Administration have highlighted both the weaknesses and the strengths in South Africa’s network of institutions, revealing – perhaps paradoxically – how the greatest threats to the country’s economic growth have finally brought to the fore its greatest guarantors. The resulting institutional tension has produced unexpected results in respect of several recent legislative encroachments on property rights.

It is unsurprising, therefore, that the weaknesses and strengths of South Africa’s institutions have been given close attention in recent assessments of the country’s economic prospects, including by the major sovereign credit ratings agencies.

Several legal developments unfolding under the Zuma Administration have exposed the weakening of key constitutional institutions, most notably the Presidency and Parliament, but at the same time have revealed the strength of other crucial institutions, most notably the Public Protector (Ombudsman) and the Judiciary.

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 clearly demonstrated by the Constitutional Court at the end of March this year. In a unanimous and important judgment, the Court upheld a report by the Public Protector, Adv. Thuli Madonsela, in which she had directed the President personally to repay the state a portion of the R246 million improperly spent on amenities at his Nkandla 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 also contravened the Constitution by purportedly absolving the President from doing so.

Presidency and Parliament – two vital constitutional institutions – have been weakened by their occupants. At the same time, however, they show how the Judiciary, as well as the Public Protector, have been compelled to consolidate their own institutional strength and reinforce the rule of law.

While South Africa’s economic prospects are undoubtedly threatened by the endemic maladministration that the Executive and Parliament have simply failed to address, the effective response to those threats by institutions such as the Judiciary, the Public Protector, and to some extent the Treasury, provides some confidence that South Africa continues to uphold the rule of law, an essential ingredient for economic prosperity.

Accordingly, among its reasons for maintaining South Africa’s investment-grade sovereign credit rating in May, Moody's observed that the recent judgments against the President “attest to the strength and independence of South Africa's constitution and judicial system and renewed attentiveness to bringing corruption out into the open and maintaining the rule of law.”

One hopes that the robustness of the Judiciary and the Public Protector in promoting the rule of law are now beginning to influence both Parliament and the Presidency. Indeed, there have been some positive signs in the recent handling of several draft laws that pose threats to property rights (and thus to investor confidence). These include:

Private Security Industry Regulation Amendment Bill, 2012 (“Private Security Bill”)

- This Bill contains an indigenisation clause which would require all private security companies to be more than half-owned by South African citizens. If enacted, this would place South Africa in breach of its obligations under the World Trade Organisation’s (“WTO”) General Agreement on Trade in Services, exposing South Africa to sanctions in trade sectors well beyond private security.[1]

- Parliament declined to take legal advice on these risks and hastily passed the Bill before the 2014 general election.

- Over two years later, however, the President has still not signed the Bill into law. The reason for this is unclear, but may stem from concerns about the country's WTO obligations, lack of public consultation or both.

Restitution of Land Rights Amendment Bill, 2013 (“Restitution Bill”)

- The Restitution Bill aimed to resolve concerns that the original opportunity for people dispossessed under apartheid to lodge land restitution claims had been too short. That window closed in 1998, after some 80,000 claims were lodged, many of which remain unresolved. The Restitution Bill would open a second window to lodge claims, expiring at the end of 2018.

- This was criticised by numerous land rights groups on various grounds, including that it would prejudice original claimants who, whether already awarded or still awaiting restitution, would be exposed to competing claims on the same land and would have to wait even longer for finality and security of tenure. These concerns received little to no consideration by Parliament, which hastened to pass the Bill before the 2014 election.

- Although President Zuma assented to the Bill, in July the Constitutional Court struck it down on the grounds that Parliament had denied the public a meaningful opportunity to influence and participate in its legislative process. Parliament is now required to restart the process from scratch.

Mineral and Petroleum Resources Development Amendment Bill, 2013 (“MPRDA Amendment Bill”)

- This Bill substantially widens the discretionary powers of the Minister of Mineral Resources and specifically empowers him to “designate” minerals which must be offered at discounted prices to local manufacturers, failing which they may not be exported without his prior consent. It also gives the state a twenty per cent “free carry” stake in upstream petroleum production companies, worsening regulatory uncertainty in a sector which, despite promising discoveries, has failed to attract sustainable investment.

- Brushing off serious concerns expressed by business, labour and civil society, Parliament likewise rushed to pass this Bill before the 2014 election.

- In January 2015, the President exercised his constitutional prerogative (hitherto rarely invoked by him) to refer the Bill back to Parliament for reconsideration, indicating that it would not pass constitutional muster.

His reasons included that the beneficiation clauses contravened South Africa's international trade obligations under the GATT as well as its free trade agreement with the European Union,[2] and that Parliament’s “highly compressed” period of public consultation “did not sufficiently facilitate public participation”.

- Parliament initially appeared to ignore the President’s concerns as well as the Opposition's suggestion that it obtain expert advice on the trade law issues It now appears to be having second thoughts about the matter.

Expropriation Bill, 2013 (“Expropriation Bill”)

- This Bill aims to create a uniform and fair procedure for the acquisition of land by the state. While it is a vast improvement on the existing law, it has been criticised for failing to define key concepts clearly, such as “property”, “public purpose” and even “expropriation”.

- In a process criticised as unduly rushed, Parliament adopted the Bill in May this year.

- In July, however, President Zuma requested Parliament to explain the processes followed in adopting in the Expropriation Bill, as he had received complaints that Parliament had “failed to facilitate sufficient consultation with the public”, among other procedural issues.

These recent exertions of consideration and constitutional stewardship may signal a strengthening in the institutional approach of the Presidency, guided by the Judiciary’s robust scrutiny of Parliament’s poor legislative work. It has provided an unexpected but important bulwark against the erosion of property rights, hopefully helping to allay the anxieties of both domestic and foreign investors, as well as their financiers.

Regrettably, this treatment was not accorded to the misnamed Protection of Investment Bill, 2015, which Parliament also passed in unexplained haste, effectively ratifying (without interrogating) the Department of Trade and Industry’s unilateral termination of all thirteen of South Africa’s bilateral investment treaties with EU and Switzerland, as well as its unilateral repudiation of the SADC Protocol on Finance and Investment.

That bill was signed into law on 15 December 2015, the same Sunday on which President Zuma was forced to fire his short lived Finance Minister, Des van Rooyen, days after his surprise appointment.

This all shows that 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. As long as the stronger institutions remain able to arrest and remedy the weakening of the others, the essential conditions for economic growth should remain intact.