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Foreign investment risk

Recently much has been said about the South African government's decision not to renew existing bilateral investment treaties (BITs). The discussions became even more heated after South Africa unilaterally terminated its BITs with Belgium, Luxembourg and Spain. Since then Karel de Gught, European Commissioner for Trade, and the South African Minister of Trade and Industry, Rob Davies, have been airing their opposing views on the matter. The European Union accounts for approximately 80% of all foreign direct investment in the country, thus explaining why the topic is so significant.

BITs are international agreements between two countries whereby each country affords the investors of the other country protection against expropriation. This protection afforded to foreign investors is independent of any protection offered in terms of , a country's domestic legislation or a country's international obligations, for instance at the World Trade Organization. In other words a foreign investor does not need to have recourse to a foreign domestic legal system in order to enforce its protection. Nor does the foreign investor have to lobby its national government to become involved in international disputes, such as the World Trade Organization's Dispute Settlement Body, where an international obligation not to expropriate foreign investment has been violated. Instead, BITs typically allow foreign investors immediate recourse to arbitration, such as at the World Bank's International Centre for the Settlement of Investment Disputes (ICSID). This is indeed an important aspect of BITs as it does not subject the foreign investor to either a foreign legal system nor to difficult lobbying and a potentially political compromise that may not necessarily be in the foreign investor's best interest.

The South Africa government attempted to soothe the European investors' fears by stating that the termination and non-renewal of the BITs was due to the fact that South Africa is in the process of modernizing its current regulatory framework dealing with foreign investment. To this extent, the South African government is in the process of drafting a Foreign Investment Bill which will replace all of South Africa's BITs. In the meantime, South Africa states, investors should not fear as the South African Constitution protects foreigners against expropriation.

Indeed it is true that the South African Constitution does in fact protect investors against expropriation. However, the level of protection is not as wide or as certain as what may be provided for under BITs and as such may be limited under the Constitution. The section of the Constitution dealing with this aspect has not yet been comprehensively defined in prior challenges brought and as such the relevant section does remain somewhat uncertain. , Where the Constitution does indeed allow for expropriation, compensation needs to be paid, which can either be agreed or in the event that there is no agreement, a court will decide on the compensation (a court's approval may also be required even if there is agreement). The amount of compensation must be just and equitable and must reflect an equitable balance between the public interest and the interests of the foreign investor having regard to a host of factors which may positively or negatively affect the determination of the compensation. The valuation of the compensation under the South African Constitution may not be as favourable as the value of compensation afforded under the BITs. Thus save for the fact that a foreigner will have to have recourse to a foreign court system if it challenges an expropriation under the Constitution, it may be that the foreigner will not obtain the same bargain under the South African Constitution than what was on offer under a BIT.

In any event even if South Africa unilaterally terminates all of its BITs, it does not imply that foreigners have less protection (if reliance is only placed on the South African Constitution). In fact the foreigners will remain to enjoy the same level of protection afforded by the relevant BIT for a number of years. This is due to the fact that all BITs provide for protection even once the BIT has been cancelled. The duration of such protection will vary from BIT to BIT and ranges from 10 to 20 years.

Given that the timeframe during which full protection is being afforded is rather lengthy, the concerns with relying on domestic legislation as well as foreign investor concerns, would it not have been prudent for the South African government to first conclude a suitable Foreign Investment Bill, taking on board its current BITs partners inputs, prior to terminating the current BITs? The Department of Trade and Industry itself was also recently involved in ensuring investor protection and compensation for expropriation was included in the Bilateral Investment Protection Agreement (BIPA) concluded between South Africa and Zimbabwe. This protection was seen as a prerequisite by South African investors, without which they were not willing to commit to investing in Zimbabwe. As such investor protection, whether for South African Companies or foreigners, is an important consideration which investor consider prior to investing in foreign markets. ,

Rian Geldenhuys

© Trade Law Chambers 2013

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