Financial Mail: Investment Bill: Europeans cry foul

PRESIDENT Jacob Zuma’s nine-point plan to jump-start the economy includes a commitment to attracting more foreign direct investment, which also includes addressing the "trust deficit" between government and business.

Government believes its revised Promotion & Protection of Investment Bill (PPIB) will go a long way towards achieving this through the protection it guarantees foreign investors. But the investment bill, which officials spent the better part of two years changing after an outcry from business, has, at best, done little to shore up confidence in SA’s economy. At worst, it pits SA against its biggest investment partner, the European Union.

The EU Chamber of Commerce & Industry in SA, which represents the 2 000 European businesses that have set up shop in SA and that make up 80% of SA’s foreign direct investment, has warned that disinvestment is inevitable unless the bill is changed to offer them more comfort and unless SA can improve its competitive edge.

At the heart of the stand-off is SA’s shift to a more inward-looking approach.

This is underpinned by SA’s move to regulate investors so that government’s developmental agenda can be realised, including black economic empowerment with increasing emphasis on black ownership, management control and local beneficiation.

As a result, SA has decided to do away with the bilateral investment treaties (BITs) it has with its trading partners and to replace them with the PPIB.

The main clauses that are in dispute are those that deal with the protection foreign investors have in the case of a dispute. Under the BITs, foreign investors had the right to international arbitration.

Zuma’s government does not believe that foreign investors should have more rights than domestic investors, who have no right to international arbitration. It is also concerned that international arbitration is biased towards corporate interests at the expense of the host nation’s development policies.

A challenge to SA’s empowerment regime by a group of Italian investors in the International Centre for the Settlement of Investment Disputes reinforced this concern.

SA believes it has compromised in the revised draft of the bill, which allows state-to-state arbitration. Permission for this will be granted only when domestic court processes have been exhausted.

European companies are not happy. They want the guarantee of neutral hearings, especially when the host nation’s political and legal systems are designed to promote economic redress in the form of empowerment and expropriation.

Government, however, believes the Europeans are being overly dramatic after being spoilt with easy, preferential access to the SA economy.

Trade & industry minister Rob Davies says: "With regards to the ‘dispute resolution’, any government action that affects the rights of investors can be raised with the DTI or any competent authority playing a facilitatory role in the resolution of the matter. All investors will be able to submit disputes before national courts or relevant authorities, and subject to the exhaustion of domestic remedies, the government may consent to international arbitration in respect of investments covered by this act, once promulgated."

EU investors want more certainty than a clause that simply states that the constitutional provisions will apply. Their concern and mistrust is worsened by the fact that several provisions in the investment bill rely on other pieces of legislation that are either not in operation, are in the process of review or require review. These include the Expropriation Bill and the Valuation Bill.

The SA Institute for International Affairs has cautioned that in the minds of some foreign investors the investment bill’s vague and ambiguous language, coupled with SA’s emphasis on regulating in the public good, could be interpreted as being the "thin edge of an expropriation wedge".

It is true that SA’s decision to replace BITs with domestic legislation is not unique. It is in line with international trends. But it is the content of this replacement legislation that counts, especially for a country falling in global FDI rankings. The consequences of SA’s higher costs of doing business, perceptions about political instability and policies that contradict government’s we-are-open-for-business mantra are documented in the 2015 World Investment Report by the UN Conference on Trade & Development (Unctad). While there was a 16% global slowdown in FDI, most developing economies bucked this trend with a 2% increase. SA’s steep decline in FDI was the exception. Investment flows into the country dropped by 31,2% from US$8,3bn in 2013 to $5,8bn in 2014.

The EU’s ultimatum to SA is simple — offer more protection and a better competitive edge or deal with the economic fallout of disinvestment.

"We do not want to divest. But there are more competitive destinations. We need more comfort. As we speak, some of our members are actively investigating other African destinations for their regional operations," says EU Chamber of Commerce & Industry in SA chairman Stefan Saskoschek. He says the spirit of the bill is that SA is lukewarm about foreign direct investment.

Legal and business organisations that have made submissions to parliament on the bill have stressed that if SA is serious about creating a more attractive investment climate, it will have to do more than write the correct assurances in an investment bill. It must embark on a holistic policy review to ensure that everything pulls in an investor-friendly direction.

Unctad reinforces this view, saying that though the bill offers to treat all investors equally, it does not actively promote investment.

"Beyond the scope of the current bill, further work is important to strengthen the dimensions of investment facilitation and the policy coherence of the regulatory framework ... In order to attract investment one needs other policy measures," Unctad’s Geneva-based director on investment and enterprise, James Zhan, told MPs on parliament’s trade & industry portfolio committee.