Foreign direct investment - The law weights in
29 January 2016
The Protection of Investment Act and the Competition Commission's Public Interest Guidelines
The past few months have seen several political and economic developments that have severely impacted the attractiveness of South Africa as a foreign direct investment destination. These have included both local and external developments, such as the surprise removal and replacement of the Minister of Finance in December 2015, the longstanding speculation about, followed by an actual increase in, interest rates in the United States, and the slowdown in the Chinese economy.
Amidst all of the political and economic developments, two legislative publications, which in less eventful times, may have made headlines, almost went unnoticed. They are, nevertheless also likely, in time, to contribute to the list of factors that will influence the decision of foreign companies to commit funds to South African businesses.
The first of these is the assent by the President, on 13 December 2015, to the Protection of Investment Act 22 of 2015 (the Investment Act). The enactment of the Investment Act followed a process that began some eight years previously, when the government commenced a process of reviewing the Bilateral Investment Treaties (BITs) then in place between South Africa and various national investment partners. The process, completed in July 2010, resulted in a decision by the South African government to refrain from entering into new BITs unless there were compelling political or economic reasons to do so, to terminate existing BITs and offer partners the possibility that South Africa might re negotiate BITs on the basis of a new model.
At the same time, the government proposed to draft foreign investment legislation that would be aligned with the Constitution and would clarify the practical application of certain typical BIT provisions under South African law. Pursuant to this process, South Africa terminated its BITs with various European countries, including Germany, Belgium Luxembourg, Spain, Switzerland, the Netherlands and Denmark. Germany, in particular has issued a statement expressing its disappointment at that decision.
The Promotion and Protection of Investment Bill was first published for discussion and comment in early 2013. After about a year and a half of public comment and parliamentary debate, the Bill was passed under the name of the "Protection of Investment Act".
The most noteworthy effect of the Investment Act in relation to foreign investment is that it does not distinguish between local and foreign investors, unlike the BITs, which obviously applied to, and protected, investors from the foreign states with which they were concluded. The Investment Act, by contrast, allows the South African government to apply the same rules to foreign investors, irrespective of their countries of origin, as to local and other foreign investors. Indeed, the "long title" of the Investment Act states that the Act is intended, inter alia, to achieve "a balance of rights and obligations that apply to all investors (an investor being defined as "an enterprise making an investment in the Republic, regardless of nationality")".
In keeping with this principle, several sections of the Investment Act record and entrench the rights of local and foreign investors to equal treatment. These include the following examples:
- section 7(2), which provides that the Act does not "create a right for a foreign investor or prospective foreign investor to establish an investment in the Republic";
- section 8(1), which provides that "foreign investors and their investments must not be treated less favourably than South African investors in like circumstances"; and
- section 9, which provides that "the Republic must accord foreign investors and their investments a level of physical security as may be generally provided to domestic investors in accordance with minimum standards of customary international law and subject to available resources and capacity".
The Investment Act goes further by making foreign investors automatically subject to any measures that the government or any organ of state may take, including measures aimed at:
- redressing historical social and economic inequalities and injustices;
- upholding the values and principles espoused in section 195 of the Constitution;
- upholding the rights guaranteed in the Constitution;
- promoting and preserving cultural heritage and practices;
- indigenous knowledge and related biological resources, or national heritage;
- fostering economic development, industrialisation and beneficiation;
- achieving the progressive realisation of socio economic rights; or
- protecting the environment and the conservation and sustainable use of natural resources.
In addition, in terms of section 8(4), foreign investors and their investments will not have the right to demand the benefit of any treatment, preference or privilege resulting from:
- taxation provisions in any international agreement or arrangement or any law of South Africa;
- any government procurement process;
- any subsidies or grants provided by the government or any organ of state;
- any law or other measure, the purpose of which is to promote the achievement of equality in South Africa or designed to protect or advance persons, or categories of persons, historically disadvantaged by unfair discrimination on the basis of race, gender or disability;
- any law or other measure, the purpose of which is to promote and preserve cultural heritage and practices, indigenous knowledge and biological resources related to them, or any national heritage, or
- any special advantages accorded in South Africa by any financial institution established for the purpose of development assistance or the development of small and medium businesses or new industries.
A further departure from the usual practice adopted under BITs that the Investment Act has introduced is in the field of dispute resolution. Typically, BITs provide for international arbitration. This is designed to cater for the concerns felt by foreign investors in many countries that they may not receive fair or equal treatment in the courts of the "host" country, especially where they are in dispute with the government of that country.
On the other hand, international arbitration has various drawbacks, particularly as the costs can be extremely high and the process may take a long time before a final award is made. The Investment Act does not expressly prohibit international arbitration, but, in keeping with the usual legal principles applied to arbitration, for a dispute to be referred to an international arbitration, both parties must agree. The government may only agree voluntarily to an international process if "domestic remedies" have been exhausted. The domestic remedies contemplated are specified in the Investment Act. Section 13 provides for a voluntary referral by either party to mediation by a mediator appointed by the Department of Trade and Industry (unless the Department itself is a party to the dispute, in which event the Judge President of one of the divisions of the High Court of South Africa may be approached to appoint a mediator). The effect, in practice, is that a dispute involving the South African government may not be referred to an international arbitration.
The second development that is likely to affect, and will have to be taken into account by, foreign investors into South Africa are the Guidelines on the assessment of public interest provisions in merger regulation under the Competition Act 89 of 1998 (as amended) (the Guidelines), which were published by the Competition Commission in the Government Gazette on 21 December 2015. The objective of the Guidelines, which is set out in paragraph 4, is "to provide guidance regarding the Commission's analysis of mergers by indicating the approach the Commission is likely to follow and the types of information that the Commission may require when evaluating the public interest considerations in terms of section 12(A)(3) of the [Competition] Act".
By way of background, section 12A(1) of the Competition Act requires the competition authorities (the Competition Commission, Competition Tribunal or Competition Appeal Court, as the case may be), when considering whether or not to approve a merger, with or without conditions, to consider:
- where a merger would result in a substantial lessening of competition, whether it can or cannot be justified on substantial public interest grounds; and
- where the merger is unlikely to substantially prevent or lessen competition, whether it can or cannot be justified on substantial public interest grounds.
In making this determination, section 12A(3) requires that the competition authorities consider the effect that the merger will have on:
- a particular industrial sector or region;
- the ability of small businesses, or firms controlled or owned by historically disadvantaged persons, to become competitive; and
- the ability of national industries to compete in international markets.
It is interesting to note that the criteria provided for by the Competition Act correspond with some of the measures that are recognised by the Investment Act as legitimate interests which, under that Act, the government may take measures to protect and against which a foreign investor cannot claim any "immunity" that is not available to a local business. In particular, the similarities between the public interest criteria provided for by the Competition Act and the following interests recognised by the Investment Act are clear:
- redressing historical, social and economic inequalities and injustices;
- fostering economic development, industrialisation and beneficiation; and
- achieving the progressive realisation of socio economic rights.
The impact of the Competition Act's requirements that public interest considerations be taken into account in approving mergers has already been felt in relation to substantial acquisitions by overseas companies of South African businesses. Logically, the more substantial the acquisition, and the more influential the acquirer, the more likely the transaction is to have implications for the public interest in South Africa. Recent high profile examples are Walmart's acquisition of Massmart and the hostile takeover by Kansai Paint Co. Limited, a Japanese company, of Free World Coatings Limited.
In both of these cases, the mergers were approved after intervention by various government departments, subject to conditions designed to protect public interest concerns. These included, in the case of Walmart, conditions designed to limit job losses and protect local smaller and medium sized businesses and, in the case of Kansai, in addition to protection of employment, a condition requiring the acquiring firm to implement a broad-based black economic empowerment transaction.
Following from these decisions, and several others in which public interest concerns arose, there were growing concerns at what were perceived to be inconsistent and unpredictable application of the public interest considerations by the competition authorities in assessing mergers. These disparities were a natural consequence of the fact that, by definition, "public interest" is a matter of policy, and a wide degree of discretion must be exercised by the authorities. This often resulted in protracted debate and litigation delaying the completion of mergers and, therefore, the efficient conduct of business. With both investors and lawyers placing a high value on certainty and predictability, there were concerns that the lack of these qualities would detract from the attractiveness of South Africa as an investment destination.
Against this background the Guidelines were published, with a view to providing merging parties with a greater degree of certainty as to the approach that will be adopted by the competition authorities in these cases.
Similarly to the Investment Act, the Guidelines make provision for measures designed to address the negative effects of mergers on the criteria identified in the Competition Act as relevant to public policy.
For example, in the case of an identified negative effect on the ability of small and medium enterprises and enterprises controlled by historically disadvantaged individuals to become competitive, these could include establishing a supplier development fund for technical and information support and assistance of SMEs and HDIs (such as was imposed in the Walmart case). In relation to the ability of national industries to compete in international markets, the measures could include obliging merging parties to invest within a specified time period, an obligation to create jobs, an obligation to introduce new products and technologies (an example of this may be seen in the Kansai merger) and training, re skilling and skills upliftment programmes.
The Investment Act, although passed by Parliament and assented to by the President, is not in effect, and will only come into effect on a date to be determined. In addition, each BIT will remain in force until the notice period that is required to terminate it has expired.
With regard to the Guidelines, the Commission has been at pains to reiterate that they are no more than an indication of the approach that it will follow and that will not fetter its discretion to consider other factors on a case-by-case basis.
Nevertheless, both provide an indication of the South African government's intention to pursue local socio economic goals and to prefer foreign direct investment that is seen to support the achievement of those goals. As previously mentioned, political and economic factors will always play a far more influential role in influencing the decision of potential foreign investors. However, the type of legislation affecting foreign direct investment that is introduced and the way in which it is interpreted must also affect not only the decision to invest, but the type of investors and investments we can attract.
The Investment Act, previously largely unnoticed, has attracted some attention and indeed criticism from foreign governments and the media at the World Economic Forum in Davos, followed by attempts by the Minister of Finance to play down its effect on investors' choice of South Africa as an investment destination.
The Guidelines will undoubtedly also become a factor when they start to be applied in high profile transactions involving well-known international companies (the SAB Miller/AB Inbev merger may well be first test case), and the way in which they are applied will be watched keenly by potential future investors and their advisors.
As with all laws, it is suggested, the key to the successful implementation of both the Investment Act and the Guidelines by the relevant authorities will be consistency and transparency, allowing investors to plan their strategies with confidence.