South Africa’s new investment laws may deter foreigners from putting money into the country

The Protection of Investment Act officially came into effect on 13 July 2018.

The controversial bill, which was signed into law in 2015, has faced harsh criticism, with the EU Chamber of Commerce stating in that the bill ‘won’t protect or promote investment’.

Although the stated purpose of the Act is to protect foreign investors in South Africa, overall, the protections offered in the Act are substantially diminished when compared to the substantive standards contained in international treaties, explains Sarah McKenzie of law firm Webber Wentzel.

Below she set out some key features of the Act which she said every investor should be aware of.


Governmental power

According to McKenzie, the Act explicitly grants the South African Government the right to take regulatory measures to:

  • Redress historical, social and economic inequalities and injustices;
  • Uphold the rights, values and principles contained in the Constitution of the Republic of South Africa;
  • Promote and preserve cultural heritage, foster economic development, protect the environment; and
  • Achieve the progressive realisation of socio-economic rights.

“This seeks to ensure that the rights of foreign investors cannot be interpreted in a way that would infringe on the government’s right to implement regulatory measures that it sees as being in the public interest,” said McKenzie.

“While the Act sets forth various protections, there is a concern that these do not provide any greater comfort than those already included in the Constitution. More so, as the Act is ordinary legislation, it may be repealed, revoked or amended at any stage in the future,” she said.

“Also, although the Act grants South Africa the right to take regulatory measures, this differs from the protection under investment treaties in that investment treaties would ordinarily protect investors from any adverse effects of such measures insofar as they result in an expropriation or unfair and inequitable treatment of the investor.”


No compulsory investor-state arbitration

According to McKenzie, the Act does not provide for compulsory investor-state arbitration and subjects disputes under the Act to the South African domestic courts.

“This is fundamentally different to the protections offered at international law through investment treaties, which not only enshrine generous protections in line with international law jurisprudence, but also ordinarily require disputes under the treaty to be submitted to a neutral arbitral tribunal,” she said.


Recourse to international arbitration has been explicitly removed

Investors with grievances under the Act will only be able to request the South African Department of Trade and Industry to appoint a mediator and/or to approach a South African court or a tribunal or statutory body provided in any other South African legislation, said McKenzie.

She noted that unlike investment treaties – which prescribe compulsory investor-state international arbitration outside of South Africa before an international tribunal – the Act contains no compulsory referral to international arbitration at all.

“To the extent that international arbitration is mentioned in the Act, it may only be conducted as between two States (i.e., not involving the investor directly) and only with the consent of both States.

“The impact of this on dispute resolution clauses in contracts concluded with the government after the date of the commencement of the Act is unclear,”she added.

“The Act fails to address concerns over the neutrality of the forum for adjudicating any investor disputes, which is one of the key rationales for the investor-state arbitration regime which has become entrenched in international law and commerce since the 1960s.”


Removal of standards 

The Act does not contain a most favoured nation treatment standard, and a fair and equitable treatment standard, said McKenzie.

“These protections have been the cornerstone of modern international investment law and their omission represents a significant departure from what has become a norm.

“The Act curtails the possibility of claiming compensation significantly and alters the standard of compensation to what is ‘just and equitable’ (to conform to the constitutional standard described above), rather than full market value compensation,” she added.


Protecions are unclear 

According to McKenzie some of the protections offered by the Act are unclear.

“By way of example, section 8 of the Act provides that foreign investors and their investments must not be treated less favourably than South African investors ‘in like circumstances’,” she said.

“The Act, however, does not define ‘like circumstances’ and the factors which should be taken into account in determining whether there are like circumstances are so vague and broad that they have the potential to be used to discriminate against foreign investors.”


Read: 6 new banks launching in South Africa soon

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South Africa’s new investment laws may deter foreigners from putting money into the country