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South Africa's New (Lowered) Protection of Foreign Investment against Expropriation of Land

Posted on 15 December 2020

In post-apartheid South Africa, few policy areas have been as enduringly sensitive as redistributive land reform. It is a challenge so precarious that meaningful engagement has been neither contemplated nor implemented in any previous presidential administration.

However, over the last two and half years, land reform has been at the top of South Africa's agenda and great strides have been made to achieve a fairer and more equal system. To understand the significance of this progress – and the potential impact on foreign investment – land reform must be viewed through the lenses of three separate but connected legislative developments.

Amendment to Section 25 of the Constitution

Section 25 of the Constitution of the Republic of South Africa, Act 108 1996 (the "Constitution") protects the right of private ownership of property. In its current form, section 25 states that no person can be arbitrarily deprived of their property unless in terms of a law of general application, the deprivation is for a public purpose or in the public's interest, and the deprivation is subject to compensation. The courts have established that the remit of "property" under section 25 is not limited to land, but includes almost anything of economic value (movables and immovable, corporeals and incorporeals, real rights and personal rights, intellectual property rights and claims with monetary value).

In recent years, several political parties have sought to amend section 25 to allow for specifically for expropriation of land without compensation.  To this end, in February 2020, the Constitution Eighteenth Amendment Bill (the "Amendment Bill") was published. The proposed amendment provides that a court may determine that in certain specific circumstances, which will have to be provided for in legislation, it will be “just and equitable” that the amount of compensation for expropriation of land and any improvements thereon be zero.  The Amendment Bill therefore deals only with land and other forms of property will not be subjected to expropriation without compensation.

The commentary surrounding the proposal has been split into two camps. One view is that the Amendment Bill merely makes explicit what is implicit in the Constitution. The other view is that the proposed amendment sends unnecessary signals to an already worried international investment community and will only weaken investor confidence. We note that the Amendment Bill is not yet in its final form.

The Expropriation Bill

On 9 October 2020, after a two-year consultation process including thousands of public hearings and submissions, the Expropriation Bill was published. The Expropriation Bill is set to replace the Expropriation Act of 1975 (which is outdated and unconstitutional) and details the rules by which the Government can lay claim over land "in the public interest" and "for public purpose".  The Expropriation Bill will be presented to the National Assembly for debate and adoption.

One of the main purposes of the Expropriation Bill is to determine when it is just and equitable for the Government to expropriate land without compensation (section 12(3)). These circumstances include, but are not limited to:

  • where the land is not being used and the owner’s main purpose is not to develop the land or use it to generate income, but to benefit from appreciation of its market value;
  • where an organ of state holds land that it is not using for its core functions and is not reasonably likely to require the land for its future activities, and the organ of state acquired the land for no consideration;
  • where the owner has abandoned the land by failing to exercise control over it;
  • where the market value of the land is equivalent to, or less than, the present value of direct state investment or subsidy in the acquisition and beneficial capital improvement of the land; and
  • when the nature or condition of the property poses a health, safety or physical risk to persons or other property.

While the debate around expropriation without compensation has been controversial, it is worth noting that any dispute flowing from such a process is still subject to final determination by a court (section 12(4)). 

It remains to be seen whether the Amendment Bill would indeed be necessary if the Expropriation Bill is adopted in its current form. The fact that the Expropriation Bill proposes that nil compensation for expropriation should apply in certain circumstances may support the view that there is nothing in the current wording of section 25 prohibiting expropriation without compensation in any event.

Protection of Investment Act

From an international investment perspective, the Expropriation and Amendment Bills ought to be viewed in light of South Africa's existing foreign investment protection regime.  Until 2010, South Africa offered protection to international investors through a network of bilateral investment treaties (“BITs”). South Africa signed 50 BITs in total, which all made provision for Investor-State Dispute Settlement (“ISDS”) under ICSID, UNCITRAL or ad hoc arbitration proceedings.

In 2007, South Africa was sued at ICSID by a group of European investors who alleged that the Government had extinguished their mineral rights without providing compensation (Piero Foresti, Laura de Carli and others v the Republic of South Africa, ICSID Case No. ICSID Case No. ARB(AF)/07/01). South Africa argued that the legislation was designed to improve social conditions of historically marginalised and discriminated citizens. While the case settled, it exposed how BITs and ISDS arrangements could pose a risk to South Africa’s own regulatory and legislative frameworks. As a result, the Government decided against renewing its BITs (to date, just twelve BITs remain in force).

The absence of BITs created a gap in the investor protection system, compelling Parliament to pass legislation, namely the Protection of Investment Act (the “Act”) which came into force in July 2018. It is worth noting that the Act covers a spectrum of investments, not only land as is the topic of this article. Under section 2(2) of the Act, "investment" includes shares, a debt security of another enterprise, loans to an enterprise, movable property (including property rights such as mortgages or liens), claims to money or performance under contract having financial value, copyright and intellectual property rights, returns on investment and rights or concessions conferred under contract.

Compared to South Africa's BITs, the Act does not provide the same, robust protection for foreign investors and significantly departs from the international standards of dispute resolution, expropriation and compensation. 

For example, under section 13 of the Act, the obligation to submit disputes to international arbitration is replaced by a process of mediation. Subject to the exhaustion of internal remedies, foreign investors may sue in the local South African courts.  International arbitration proceedings may only commence at the Government’s discretion, and such proceedings will not be between the investor and the Government, but between the South African State and the home State of the investor. The Act therefore politicises the dispute.

Furthermore, the expropriation clause in the Act states that it reflects section 25 of the Constitution. As set out above, section 25 currently requires just and equitable compensation to be paid in the event of expropriation, but that can change if either the Expropriation or the Amendment Bills are adopted.

Read in conjunction with the Expropriation Bill, there will be no need for “prompt, adequate and effective” and “immediate, full and effective” compensation, which are the compensation standards in most international investment agreements.

Conclusion

Despite scaremongering by some media outlets, the Expropriation Bill and the Constitution Amendment Bill have been welcomed as key milestones in the battle for a more equal land ownership structure in South Africa. Redistributive land reform has an important role to play in a country where structural and intergenerational inequality has become the standard. As the Expropriation and Amendment Bills have not yet come into force, a "watch and wait" approach is recommended.

In the meantime, caution should be exercised. The Investment Protection Act does not give foreign investors (whether the investment consists of land or otherwise) the same type of legal protection as would be expected in BITs. As such, international investors will effectively be subjected to domestic standards of expropriation and local dispute resolution. Foreign investors should be careful to protect their investments by engaging legal counsel with specific expertise in the field.

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